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Falling inflation puts brakes on 2014 rate hike

Falling inflation puts brakes on 2014 rate hike

The latest inflation figures have cast serious doubt on whether the Bank of England’s (BoE) Monetary Policy Committee (MPC) will raise interest rates in the short term.

Given the improving economic backdrop, the market has been generally anticipating a hike before the curtain closes on 2014. But a lower-than-expected Consumer Price Index (CPI) reading of 1.6% in July, down from 1.9% in June, has meant there is less pressure on Governor Mark Carney to hike rates, with inflation well below the BoE’s 2% target.

Aside from inflation numbers, there are a number of other factors that could put the brakes on the BoE from raising interest rates in the near term. Wage growth remains lacklustre for example and the UK’s consumer debt burden stands at £1.44 trillion, up from £1.42 trillion a year earlier. Notably, the BoE has already cautioned there could be a modest slowing in output during the second half of the year.

Plot twists in the interest rate saga ‘are coming thick and fast’ noted Laith Khalaf, senior analyst at Hargreaves Lansdown. The publication of the minutes of August’s MPC’s meeting showed a significant sign of dissention in the ranks as two members of the committee voted to raise rates by 25 basis points, marking the first time in more than three years that any member has voted for a rise.

Khalaf however cautioned against reading too much into this. He added: ‘The last time the committee vote was split was in July 2011, shortly before the eurozone crisis kicked interest rate rises into the long grass. Inflation data and continuing anaemic wage growth may also put somewhat of a dampener on the enthusiasm for rate rises.’

Alastair McCaig, market analyst at IG, believe this revelation opens the door to the possibility of an interest rate increase being squeezed in before the end of the year, but with the weaker-than-expected inflation figures, he said this is far from a foregone conclusion.

He added: “On one hand, the central bankers are pointing towards change, despite the economic data being far from supportive; a perfect balance of uncertainty to keep markets guessing.’

Anna Stupnytska, global economist at Fidelity Worldwide Investment, added: 'While dissenters within the MPC might be getting some traction over the next few weeks and months, we are most likely looking at the first quarter of 2015, or possibly second quarter, for the first base rate hike to take place.'

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