Inflation set to stay low for up to three years

Chris Papadopoullos
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Bank governor Mark Carney
THE BANK of England (BoE) yesterday shifted its expectations of a first rate hike to late 2015 as it forecast inflation to stay below target until 2017.

The UK’s economic growth was predicted to slow in 2015 to 2.9 per cent after forecasting 3.5 per cent growth for the whole of 2014.

Weak growth in the Eurozone and China are both expected negatively to impact the UK’s growth prospects – especially the Eurozone, the UK’s biggest export market.

Meanwhile, inflation as measured by annual growth in the headline consumer price index – which the BoE targets at two per cent – fell to 1.2 per cent in September. The BoE yesterday said it was likely that inflation would fall below one per cent within the next six months.

Lower commodity prices and spare capacity in the economy are expected to keep inflation low.

BoE governor Mark Carney warned he might have to write a letter to the chancellor soon, which was required whenever inflation moved away from the target by more than one percentage point in either direction.

The last such letter was written in 2012 by his predecessor Lord King. Economists have now forecast a first rate rise in late 2015.

“The key takeaway from this [inflation] report is that monetary policy is set to remain unchanged for a prolonged period,” said Martin Beck, economic adviser to the EY Item Club.

“The report suggests that the first interest rate hike in interest rates is currently more likely to occur next autumn or even later, rather than around mid-2015,” said Howard Archer of market analysts IHS.