British inflation to peak lower this year says Niesr, easing Bank of England rate hike pressure

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Falling fuel prices were behind the recent fall in inflation (Source: Getty)

British inflation will peak lower than previously thought this year, according to a group of influential economists, giving the Bank of England more leeway to leave interest rates at current historically low levels.

Inflation will only peak at three per cent in the last quarter of this year, according to forecasts published today by the National Institute of Economic and Social Research (Niesr).

That represents a significantly lower peak than May forecasts of a 3.4 per cent peak, reflecting the surprise dip in inflation recorded in June.

Read more: Sterling dips as inflation falls sharply to 2.6 per cent

Inflation fell to 2.6 per cent annually as fuel price rises slowed, easing the pressure on the Bank to raise interest rates in its latest monetary policy statement, announced at midday on Thursday.

While some economists both within the monetary policy committee (MPC) and without have advocated a start on the path to tighter monetary policy, the Bank should proceed with caution, according to Jagjit Chadha, Niesr director. He said: “The risks are on the downside on a premature rise in interest rates.”

In August last year the MPC cut bank rate from 0.5 per cent to 0.25 per cent, after survey evidence suggested a steep slowdown in growth was imminent. Niesr now says the first quarter of 2018 is the right time to contemplate raising interest rates for the first time in more than a decade.

“The process of taking back that cut may be the appropriate time to start the debate in the UK as to how we normalise.”

Read more: Slowest UK economic growth since 2012 predicted as inflation hits consumers

Niesr predicts a pick-up in investment in 2018 which will take over from consumer spending as the driver of British growth, based on evidence from the Bank’s business surveys.

“Consumer spending is no longer the engine of growth next year,” said Amit Kara, Niesr head of UK macroeconomic forecasting.

Growth is predicted to be 1.7 per cent over this year, with an acceleration to 1.9 per cent this year, unchanged from its previous forecasts.

However, UK growth will lag behind the rest of the world, which is now expected to grow by 3.6 per cent in both 2017 and 2018, the fastest global growth in six years.

Read more: Bank of England policymakers expected to bypass rate rise this week