For July, headline inflation came in at 1.6% compared to 1.9% in the previous month, the Office of National Statistics said on Tuesday, partly driven by a reversal of the strength seen last month in the clothing component.
According to Anna Stupnytska, global economist at Fidelity Worldwide Investment, the overall inflation backdrop remains benign.
“With some tentative signs of a (likely temporary) slowdown in housing, and little indication of wage pressures for now, the softness in inflation numbers leaves the BoE more room for continued policy accommodation to year end,” she says.
Adding: “While dissenters within the MPC might be getting some traction over the next few weeks and months, we are most likely looking at Q1 2015, or possibly Q2 2015, for the first base rate hike to take place.”
Andrew Wilson, head of investment at Towry, agrees, saying the fall in inflation is likely to give Bank of England governor, Mark Carney a little more breathing space in terms of pushing up rates.
Rowan Dartington Signature’s Guy Stephens, says market sentiment, while recently clouded by geopolitical uncertainty, remains of the view that UK policy makers will be the first to raise rates – a view reflected, he said, in the currency markets.
“The strength of sterling would certainly suggest the BoE will be the first to blink; the UK currency has climbed more than 7% versus the dollar over the last twelve months,” he said.
But, he adds, given Carney’s repeated pronouncements about the need for a slow, gradual process to once again normalise the base rate, the initial move is likely to be very small, 0.25% at most seems likely.
“Whether or not the Bank of England will act before the end of the year remains open for debate. The first quarter of 2015 perhaps now seems more probable, although a move too close to May’s General Election may attract more unwanted criticism,” he says.
All eyes are now on the minutes of the monetary policy meeting that will be released on Wednesday, as these will provide an indication of exactly how many members of the committee, have begun to lean the way of a rate hike and, importantly how far they are leaning in that direction.
