UK inflation report: Rates to stay below 1% into 2016

Shop-Shopping-Supermarket-Retail-Grocery-700x450.jpgThe UK CPI measure of inflation is expected to stay below 1 per cent until the second half of next year, reflecting the “continuing drag” from commodity and other imported goods prices.

In its inflation report, published today, the BoE says the outlook for global growth has weakened since August as “many emerging market economies” have slowed “markedly”.

The report says: “While growth in advanced economies has continued and broadened, the committee nonetheless expects the overall pace of UK-weighted global growth to be more modest than had been expected in August.”

The MPC are convinced that inflation will return to the 2 per cent target within two years, as announced in the report in August.

The report also raises particular concerns about China. It says although the country is growing at a slow pace as its economy rebalances towards consumption,“there is significant uncertainty about how smooth that rebalancing will be and a risk that growth slows more sharply”.

The report states: “Recent developments in China have highlighted the challenges faced by the authorities of liberalising and rebalancing the economy. A sharp slowing in China could affect the UK economy through a number of channels, including through trade and financial interlinkages.”

Estimates indicate if Chinese GDP were to fall by 3 per cent, UK output would be 0.3 per cent lower as a result.

HiFX economist Andy Scott says the tone from the Bank has turned “more cautious”.

He says: “Whilst there wasn’t anything in the report that should come as a major surprise, there was clearly a slightly more cautious tone from the BoE than the market was expecting.

“We maintain our view that whilst domestic demand looks robust, there are strong enough headwinds to want to keep rates on hold well into next year, and if some of them develop, into 2017.”