News Column

Fall in inflation triggers call for rates restraint

June 18, 2014

ian mcconnell; ian mcconnell BUSINESS EDITOR

ANNUAL UK inflation dropped sharply in May to its lowest rate since October 2009, official figures have revealed, prompting Scottish Chambers of Commerce to appeal to the Bank of England to hold off from raising interest rates.

Figures published by the Office for National Statistics yesterday showed annual UK consumer prices index inflation fell from 1.8 per cent in April to 1.5 per cent in May. The May rate was below the City's forecast of 1.7 per cent, and far short of the target of two per cent set for the Bank of England by the Treasury.

Bank Governor Mark Carney, in a speech at the Mansion House in London last Thursday, signalled the first rise in UK base rates from their record low of 0.5 per cent might not be as far off as thought.

He said: "There's already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect."

And he warned: "The housing market is showing the potential to overheat."

Liz Cameron, chief executive of Scottish Chambers of Commerce, said yesterday: "Inflation remains well within the Bank of England's target and this ought to ease the pressure for an early rise in interest rates. The priority for the Scottish economy is to nurture the signs of increasing business investment that will help to put Scotland back on the road to sustainable levels of growth.

"Our economy is headed in the right direction but for the moment it still requires the support that the Bank of England is providing. A move towards more normalised levels of interest rates ought still to be some way off."

She meanwhile contrasted housing market conditions in London with those in Scotland.

Ms Cameron said: "Although there is further evidence this month of rising house prices, it is again notable that there is a remarkable disparity between London, where prices have risen by 18.7 per cent in the year to April and Scotland, where the figure is a more modest 4.8 per cent.

"It is essential that, where this is addressed by the Bank of England, it is done other than through interest-rate rises as the expanding house-price bubble is exceptionally localised and will need well targeted measures."

Jonathan Loynes, at consultancy Capital Economics, believed low inflation would not be enough to stop base rates rising, possibly quite soon, but believed it would enable a smaller and more gradual increase than in past cycles.

He said: "Low inflation will not stop interest rates from rising, perhaps quite soon. But it should limit the size and speed of any increase and help the economic recovery to continue largely unconstrained...

"Unlike in so many previous cycles, the policy-makers should not be forced to slam the brakes on the recovery in order to prevent inflation from soaring or to dampen the housing market."

The fall in annual inflation in May was driven by air fares, and by food and clothing prices.

The ONS cited air transport as the largest contributor to the drop, with average fares falling 3.2 per cent between April and May, having risen 22 per cent between the same two months of 2013.

It said the timing of Easter was likely to be a factor in the differing movements, with the Easter weekend falling within the April data collection period this year but not last year.

Prices of food and non-alcoholic beverages fell between April and May, having been little changed between the same two months of 2013. The ONS cited a downward effect from a variety of product categories, most notably bread and cereals, meat, vegetables and soft drinks.

Clothing and footwear prices, overall, fell 0.1 per cent between April and May but rose by 1.2 per cent between the same two months of 2013.


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Source: Herald, The (Scotland)