A drop in the inflation rate to 0.5 per cent has not been enough to reverse the positions of monetary policy hawks – economists favouring a hike in interest rates.
“We think the economy is growing strongly enough to take a normalisation of monetary policy and we’re sticking by that,” James Sproule, chief economist at the Institute of Directors told City A.M. “We’re only talking about moving to 0.75 per cent over the course of the year. The longer that rates remain at these very low rates, the bigger danger there is that people and businesses build it into their expectations and forecasts.”
Former policy maker Andrew Sentance agreed.
“The Bank is supposed to look two-three years ahead and it’s not clear that the danger for the medium-term inflation outlook has gone away,” Sentance told City A.M.
“There is still a strategic challenge to gradually raise rates over time.”
Simon Ward, chief economist at Henderson Investors maintains his view that domestic inflationary pressure is strong but that prices are being kept down by falling oil prices and the lagged effect of a strong pound which may soon reverse. Core inflation – which excludes energy – rose to 1.3 per cent in December. Meanwhile, current prices are still being impacted by the pounds rising exchange rate in early 2014 which has since stabilised.