United Kingdom inflation ‘to stay below 1% into 2016’

On the other side of the Atlantic, Federal Reserve Chair Janet Yellen has kept the door open to a US tightening as soon as next month, saying a move that month is a “live possibility” if economic data remain strong.

“The outlook for global growth has weakened since the August Inflation Report”, the bank said, downgrading its medium-term growth prospects for the United Kingdom economy.

‘There remain downside risks to this outlook, including that of a more abrupt slowdown in emerging economies’.

The BOE’s dovish message will likely surprise investors and economists, many of whom were expecting the central bank to indicate that it believed markets had gone too far in pushing back expectations of when rates were likely to rise in Britain beyond next year.

The pound fell a cent against the euro and the dollar after the Inflation Report, to just over 1.40 and 1.53 respectively.

Andrew Goodwin of Oxford Economics described the Inflation Report and the minutes from the latest meeting of the Monetary Policy Committee as “indisputably doveish” and pushed out his estimate of the first rate hike from May 2016 to November 2016. The forecast for inflation two years from now is at 2.1%, as opposed to the 2% that was suggested in the August inflation report, pretty close to identical.

In September, the 12-month inflation rate stood at minus 0.1 percent, around 2 percentage points below the inflation target, the bank said.

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“With respect to the MPC members favouring unchanged interest rates, the minutes noted that there were varying opinions about the outlook for growth and inflation”.

The bank also announced that when interest rates rose to 2%, it would begin the process of selling off its £375bn pile of bonds bought through its quantitative easing programme. “Given these considerations, the MPC intends to set monetary policy to ensure that growth is sufficient to absorb remaining spare capacity in a manner that returns inflation to the target in around two years and keeps it there in the absence of further shocks”.

The meeting was closely watched as Bank of England Governor Mark Carney has said the end of the year will bring more clarity as to when rates will rise. Mr Carney had previously said the decision whether to raise rates would come into “sharper relief” around the turn of this year.

The delayed rate rise comes despite growing expectations of an increase by America’s central bank. Whereas, emerging market economies are in downward trend, hence, this this may affect the United Kingdom exports.

He says: “Every time it looks like interest rates might have to rise something else happens globally to derail that, such as the slowdown in China or the fall in the oil price”.