The Bank of England has halved its forecast for inflation in 2015 from 0.6 per cent to 0.3 per cent on the back of falling oil prices and the strength of sterling.
The UK CPI measure of inflation remained at 0 per cent in June and is expected to remain around that level for the next few months.
In its inflation report, published today, the BoE says the outlook for the rest of the year remains “uncertain”, and is likely to be “sensitive” to developments in Greece, although near term concerns have fallen.
The MPC are convinced that inflation will return to the 2 per cent target within two years, as announced in the latest report in May.
John McNeill, co-manager of the Kames Absolute Return Bond Global Fund, says: “The Bank faces the challenge of navigating between an economy which is growing strongly and inflation which remains persistently below target.
“The recent fall in global commodity prices, combined with the strength of sterling, are likely to keep inflation well below target for the foreseeable future. Today’s decision and minutes have done little to alter financial market expectations that the first rise in Bank rate will not occur until 2016.”
The central bank also stresses that as sterling has appreciated by 3.5 per cent since May and 20 per cent since March 2013, which will possibly push inflation down in the near term.
JP Morgan Asset Management chief investment officer for currencies Roger Hallam says: “These developments are undoubtedly a short-term negative for sterling, particularly given the consensus nature of overweight sterling positions. However, we remain optimistic on the outlook for the UK economy and sterling valuations should remain supported by the prospects of the Bank of England raising early in 2016.”
After the BoE announcement, sterling fell against the dollar to trade at $1.5550.
The BoE is still positive on domestic growth saying this will “remain robust” as household spending has been supported by the boost to real incomes from lower food and energy prices.
Whole-economy pay grew by 3.2 per cent in the three months to May compared to the same period a year earlier, which was one percentage point stronger than expected in the May report, the bank says.