Inflation has unexpectedly fallen to 0.3% for the month of April, down from 0.5% in March. Without inflationary pressure the MPC is unlikely to vote to raise interest rates
Inflation has fallen for the first time since September, down to 0.3% in April, from 0.5% the previous month. While this is good news for consumers, it is bad news for the Bank of England – 0.3% is far off the government set inflation target of 2%. The fall was largely due to the downward pressure of falling prices of airfares, automobiles and clothing. The Office of National Statistics said that these deflationary items were off-set by the rising cost of oil and therefore petrol and diesel, and the fact that food prices have stayed put. Ian Forrest, investment analyst at The Share Centre, added: “While inflation is still expected to be below 1% for the rest of the year it was interesting to see data from the ONS today that house prices have risen 9% over the past year and the oil price has recovered sharply in the first four months of the year.” What Does this Mean for Interest Rates? Without inflationary pressure the Monetary Policy Committee is unlikely to vote to raise interest rates any time soon – especially with no more movement across the pond. The US raised rates for the first time in seven years back in December, but has since sat tight. No rise in Bank of England base rate means no rise in either cash savings rates or bond yields either – bad news for low-risk investors. Although, with inflation so low, at least the vast majority of any yield will count as a real rate of return – inflationary erosion is minimal. “The market can barely see when there might be another rise, and at the moment is plumping for 2018,” Andrew Wilson, Head of Investment at Towry. “Core inflation was also down, from 1.5% to 1.3%, and this might further feed the narrative that the UK economy is materially slowing down, and largely due to uncertainties around potential Brexit.” Calum Bennie, savings expert at Scottish Friendly, agreed that even though the oil price has risen in recent months, the Bank of England’s 2% inflation target seems a long way off. “For those who want to grow their money over the long-term they should be considering stocks and shares ISAs as an alternative to the derisory saving rates on offer from the banks, although risk is attached,” said Bennie.
SOURCE: Emma Wall – Morningstar.co.uk
