Inflation has dipped to its lowest level in two years, and below the Bank of England’s 2% target, making a rate hike unlikely unless a Brexit-induced inflation shock occurs.
UK CPI hit 1.8% in January, down from 2.1% the previous month and from its 3.1% peak in November 2017, driven mainly by energy costs falling between December and January.
Good for households, mixed for savers
Adrian Lowcock, head of personal investing at Willis Owen, said the figure will be good news for households as wages are rising faster than inflation, which should help ease the overall cost of living.
But, he added it is more mixed news for savers. “For some, it means that the interest they earn on their cash deposits is now above the rate of inflation, so they benefit from a real income.
“However, the majority of savers are still struggling on low interest savings accounts and the lower rate of inflation coupled with Brexit uncertainty gives the Bank of England no incentive to hike rates any time soon.”
Hargreaves Lansdown senior economist Ben Brettell agreed the numbers are not going to change the BoE’s thinking about the economy or interest rates. “Assuming some kind of smooth Brexit, it should be able to gently nudge rates up over the next couple of years,” he said.
However, he added: “Of course if we get a cliff-edge, no-deal Brexit, all bets are off – a drop in sterling would likely see a sharp rise in imported inflation, but I’d expect the bank to look through this and cut rates to support the economy.”
If the UK exits in a disorderly manner
Thomas Wells, manager of the Smith & Williamson Global Inflation-Linked Bond fund, also warned a “crash out” Brexit could deliver a short-term inflation shock.
“Should the UK exit the EU in a disorderly manner, we would expect linkers (index-linked bonds) to outperform conventional gilts, as they did in the aftermath of the 2016 referendum,” he said.
