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UK inflation slows, but markets betting on interest rate rise 

Ben Brettell

Inflation data released today was somewhat overshadowed by events in Westminster, but nevertheless could have significant implications for interest rates. Contributor Ben Brettell, Senior Economist – Hargreaves Lansdown.

CPI inflation slowed to a two-year low of 2.1 percent, driven lower by falling oil prices and their knock-on effect on fuel costs. Companies’ raw material costs rose just 3.7 percent, the lowest since June 2016, in a sign that inflationary pressures in the economy are dissipating.

With inflation now close to the 2 percent target, there’s little imperative for the Bank of England to raise interest rates in the short term. But nevertheless markets are pricing in a near-50 percent chance of higher interest rates by August’s policy meeting, little changed from last week. That looks on the high side to me.

The housing market seems to be cooling, and unsecured personal debt continues to rise. Add in an unhealthy dose of Brexit uncertainty and it’s hard to see why any sane central banker would consider higher rates at present. Across the pond the Fed’s comments are increasingly dovish too, suggesting the expected rate hikes this year might now not materialise. 

Meanwhile the rise in sterling after yesterday’s ‘no’ vote in the commons might seem counterintuitive, but it seems to reflect the market’s belief that (a) Brexit may be delayed, and (b) a harsh ‘no-deal’ Brexit might be avoided. If, as now looks likely, Brexit is delayed beyond March, an interest rate rise by August surely looks improbable. Personally I’d be surprised if either the BoE or the Fed are willing to put rates up in 2019.

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