Another reason to leave interest rates unchanged

Tony Ward

August 17, 2015

Tony Ward is chief executive of Clayton Euro Risk

Back in April, many analysts predicted that the month’s eyebrow-raising inflation rate of -0.1%, the first negative figure since 1960, would be a one-off occurrence.  Since then, quite a few of those analysts have performed an about-face. Now Capital Economics plus a range of City economists suggest that CPI inflation for July (official figures out this week) will hold at 0%. However, it does seem likely that UK inflation will turn negative before year-end due to falling oil prices. 

Oil prices are at a six-month low, hence the smiles on motorists’ faces, with a barrel now costing sub-$50. According to the International Energy Agency (IEA), the glut in the world’s oil supply will last until at least next year. The IEA calculated that the oil market was oversupplied by 3m barrels per day during April to June, the highest level for 17 years. This led the organisation to raises its expectations for world oil use to 94.2 barrels per day in 2015, up 1.6m barrels. Last week, we witnessed supermarkets cutting diesel prices by between 2p and 4p a litre. With oil prices remaining low for some time, this is likely to have huge repercussions for the cost of living.

On top of this, we have reductions in domestic gas bills – British Gas is due to cuts prices by 5% this month with other utilities expected to do the same. Additionally, the weakening yuan will probably cut the price of Chinese exports, which in itself has global repercussions. 

All these factors, coupled with my arguments raised in blogs over the last few weeks, make it increasingly hard for the Bank of England to justify raising rates any time soon. However, some MPC members continue to promote the view that a rise could be on the cards sooner rather than later.  This worries me.

Capital Economics senior UK economist Samuel Tombs argued, weak growth in global demand and a supply overhang should keep commodity prices subdued means the MPC should be able to take its time over raising interest rates next year. I think this comment strikes precisely the right note.


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