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Low inflation 'may not prevent rate rise'

11/04/16

The base rate may yet rise this year, despite minimal inflation, according to one economist.

The UK financial sector has spent much of the last few years dealing with false alarms about possible base rate rises, which are often predicted a few months down the line without actually materialising.

Last year was a case in point, chiefly because the minutes of Bank of England Monetary Policy Committee (MPC) meetings hinted that some were wavering on holding at 0.5 per cent.

Convictions that change was on the way were further fuelled by minority support for a rate rise (by Ian McCafferty and Martin Weale) that continued until this month, as well as talk by governor of the Bank Mark Carney that rates could reach around 2.5 per cent by 2018.

Such possibilities have been considered before. In 2011, for instance, as many as three members supported a rate hike. However, just as in the MPC meeting this month, the committee has eventually reverted back to its unanimity for a rate hold.

Despite this, 2015 may yet see a rate rise, according to Schroeders economist Azad Zangana. Reflecting on the data that showed economic growth slowing to 0.5 per cent, he said the overall economic performance actually remains strong, once the impact of reduced oil revenues is taken into account.

He added that it is possible inflation may turn negative, which might be seen as a good reason to stick with the 0.5 per cent base rate. However, Mr Zangana noted: "Governor Mark Carney has warned that the Bank has the ability to look through short-term moves in inflation, and so may yet consider raising interest rates by the end of the year."

This assertion may be backed by recent history, albeit under Mr Carney's predecessor, Sir Mervyn King. After all, the MPC has previously 'looked through' high inflation to keep the rate at 0.5 per cent with wider economic imperatives in mind.

So for the financial sector, a response to changes in interest rates may yet be required this year, even if the low oil price keeps inflation down or even brings deflation.

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