As CPI inflation falls to 1.5 per cent, should the Bank hold off rate hikes until next summer?

Chris Williamson, chief economist at Markit, says Yes.

Quite possibly.

The case for rates to stay low for longer is being aided by several factors.

Global oil and commodity prices are low, and likely to stay historically weak due to subdued global demand (especially in key emerging markets such as China) and, in the case of energy, extra supply from the US.

The strength of sterling compared to a year ago adds further deflationary pressure through lower import costs.

At home, supermarket price wars are keeping the average bill at the checkout down.

At the same time, wage growth is at an all-time low. While we expect wage growth to start picking up soon, it looks like it has some way to go before it gets to levels that have typically rung inflation alarm bells at the Bank of England.

The economic impact of the Scottish referendum, especially in relation to sterling, clearly represents a huge unknown, but there are many factors which could collectively help keep rates on hold until next year.

Simon Ward, chief economist at Henderson Global Investors, says No.

Current low inflation reflects the lagged impact of tight monetary conditions in 2011-12, together with recent falls in sterling commodity prices.

But monetary conditions loosened dramatically from mid-2012, as the ECB and Bank of England cut banks’ funding costs.

Annual growth of narrow money (M1 – the best money measure for forecasting the economy, but widely ignored) surged from 2 to 10 per cent between mid-2012 and mid-2013, correctly predicting strong GDP growth in 2013-14.

Monetary trends lead activity by six to 12 months, and inflation by about two years.

The 2012-13 money surge, therefore, suggests that inflation will rebound in 2015, a prospect consistent with business survey evidence on capacity use, wage pressures and pricing plans.

With M1 continuing to rise in 2014, the Bank should already have started to raise official rates.

Further extended delays could create the conditions for another major inflation overshoot in 2016-17.

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