Bank of England’s Gertjan Vlieghe sees downside risks to inflation

Core inflation – stripping out energy, food and drink – remained lodged at 1 per cent. HSBC economist Liz Martins said: “This is a weak reading for the United Kingdom, which increases the uncertainty surrounding the timing of the first rate rise”.

The biggest downward impact on the annual inflation rate was from clothing and footwear, as well as gasoline.

He also identified the relative strength of the pound as a “headwind” for the economy.

Consider the numbers. In January, inflation as measured by the Consumer Prices Index, stood at 0.3%.

Events in the rest of the world have been pushing inflation in the opposite direction. “We can also restart the asset purchase program”.

The Bank is therefore confronted with a situation in which the inflation rate for goods is now -2.4% while the inflation rate for services is +2.5%.

United Kingdom was back in deflation in September as CPI inflation declined to -0.1% y/y from 0.0% y/y in August.

‘But I do think the next move is more likely to be up than down’.

In the United Kingdom, inflation has been below the Bank of England’s 2% target for more than a year and a half, even though the central bank’s main policy rate has been pegged at a record-low 0.5% for over five years.

Economic theory dictates that with unemployment this low, wage inflation, which has risen lately, should be pressuring overall inflation higher. If this starts to taper off at all, it may leave the BoE without a leg to stand on and expectations of no hike until late next year, at the earliest, will grow. This is good news for exporters, especially those in the manufacturing sector, who have struggled to make their products competitive overseas. “One major risk is that global growth continues to disappoint, and that this would pull United Kingdom growth down, both via investment and exports”.

In a testimony to the Treasury Committee on the hearing of McCafferty’s reappointment to the Monetary Policy Committee on Tuesday, he said there was a need to return the Bank Rate far enough above zero “to a level at which it can be an effective instrument” in tightening or loosening policy.

Many analysts base their forecasts on the belief that the U.S. Federal Reserve is willing to leave policy unchanged for longer than previously expected, after concerns of a China-led economic slowdown drove USA officials to postpone a much-awaited rate rise in September.