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Deflation could delay rate rise until 2016

Sarah Davidson

January 13, 2015

This morning CPI inflation figures from the Office for National Statistics revealed that UK inflation slumped to a 15-year low of 0.5% in December, down from 1.0% in November.

Whittaker said: “We now no longer expect the Bank of England to raise the base rate of interest until Q2 or Q3 2016.

“Britain is flirting with the prospect of deflation. And no area of the economy or personal finances will be unaffected.

“The UK economy still needs a serious burst of productivity growth – and there’s no longer any reason to get in the way of that.

“A new paradigm is already being felt on the financial markets this morning – and it will be felt in the pockets of consumers and mortgage holders within weeks.”

Samuel Tombs, UK economist for Capital Economics, agreed that the UK economy may see deflation; however he was cynical about the prospect of base rates staying at 0.50% until next year.

He said: “I’d agree there’s a serious risk that we’ll see deflation in the UK.

“But I think the MPC will still raise interest rates in the second half of the year or it risks seeing the economy overheat.

“Lower inflation this year will reflect external factors, not the strength of the UK economy.

He added: “Weak inflation reflects lower oil prices and lower food prices, but those will only temporarily slow it down.

“We’ll get to about 0% in February on March depending on whether petrol prices fall.

“There’s also a chance that we’ll see utility bills fall across the board – one utility company has announced that it will cut gas prices which may lead others to follow.

“But Inflation in the services sector has remained at 2% and we might see that rise a bit.

“It will become pretty clear by the end of the year that lower inflation will be a temporary phenomenon and inflation will pick up to 2% by 2016.”

Legal & General director Stephen Smith said mortgage borrowers should lock on to long-term fixes to alleviate any uncertainties on interest rates.

He said: “Many commentators are now speculating a rise may now have been deferred until early 2016.

“This is only ever going to be a deferral and not an indefinite delay.

“At some point soon interest rates will have to rise – they cannot get any lower.

“People should not be complacent and expect good deals to last forever.

“For those who want to take advantage of historically low rates there are some great medium and longer-term deals out there including 3-year, 5-year or even 10-year fixes which should give homeowners the stability to plan their finances and avoid financial shocks.”

Whittaker agreed, as he added: “We still recommend our clients to fix their mortgage payments now while the going is good.

“But even for fixed-rate mortgages, there are already some incredibly well-priced deals on the market – and this is only likely to improve further.

“More generally, the property market will be torn two ways over the coming months – as extremely low mortgage rates pile wood on the fire, but political uncertainty threatens to cool the atmosphere ahead of the general election in May.

“For that reason, we can only hope that housing policy and the property market don’t become political footballs in the next few months.”


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