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Interest rate rise unlikely before 2016

By Margaret Canning and PA

Published 16/09/2015

Danske Bank's Angela McGowan
Danske Bank's Angela McGowan

The Bank of England is unlikely to make its first interest rate hike before the first quarter of 2016 thanks to continued low inflation, Danske Bank has predicted.

Danske Bank's chief economist Angela McGowan spoke as UK inflation declined slightly from 0.1% in July to 0% in August, thanks to falling petrol prices and muted rises for fashion.

The ONS figures showed there had been zero price change during the year to August thanks to low food prices and plummeting petrol costs.

The separate Retail Prices Index (RPI) measure of inflation rose to 1.1% from 1.0% in July.

And core inflation, which strips out the impact of volatile elements such as energy, food, alcohol and tobacco - fell to 1.0% in August from the previous rate of 1.2%.

Angela McGowan said yesterday: "The drop in headline inflation was mainly due to 'clothing and footwear' which pushed the inflation rate down by 0.1 percentage points.

"While the timing of the summer sales last year are still affecting headline inflation, another major contributor to the decline was 'fuels and lubricants'. While gasoline prices fell only slightly in August, diesel prices dropped more sharply during the month.

"The current oil price level suggests that fuel prices - especially gasoline prices - could drop further going forward." Ms McGowan (left) said Danske believed the Bank of England's Monetary Policy Committee (MPC) wished to see CPI stabilise, then move higher, before it would introduce a rate hike - the first since 2009 when the rate was cut to its present level of 0.5%. "Headline inflation will most probably stay around 0% for the rest of the year but one cannot rule out that inflation could turn negative again.

"We expect CPI inflation to pick up close to 1% by January 2016 which should reduce concerns among MPC members.

"As such, we expect the Bank of England to deliver the first hike in the first quarter of 2016, probably in February."

And PwC chief economist Esmond Birnie said yesterday also marked the seventh anniversary of the collapse of US bank Lehman Brothers - the catalyst for the global economic downturn.

He added: "There remains considerable turbulence in the global economy that is impacting interest rates and fiscal policy in the UK. In that context, the data represent good news, particularly in terms of maintaining UK economic recovery."

But Northern Ireland was not benefiting from all aspects of recovery, he said.

"Combined with the recovery in real wages, low inflation is improving household incomes and is likely to continue across the UK, though to a lesser extent, here in Northern Ireland."

And he agreed with Angela McGowan's assessment that an increase in the interest rate was unlikely before 2016.

"Whilst a rise in Bank of England interest rates remains on the cards in the medium term, today's data suggest that a rise might be deferred until 2016.

"Nevertheless, the current period of stable prices is providing a boost to consumer spending power, and supporting the growth of the economy.

"This growth of domestic demand in the UK and western economies provides a counterweight to the slowdown we are seeing in China and some other emerging market economies."

Belfast Telegraph

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