POLITICS

UK Interest Rate Rise Set For Next Spring As Inflation Eases Further

16/09/2014 09:33 BST | Updated 16/09/2014 10:59 BST
Bloomberg via Getty Images
Mark Carney, governor of the Bank of England, listens during the annual meeting of the Trades Union Congress (TUC) in Liverpool, U.K., on Tuesday, Sept. 9, 2014. Carney signaled Bank of England officials will probably increase their benchmark rate from a record low in spring next year as wage growth accelerates and the recovery gains momentum. Photographer: Simon Dawson/Bloomberg via Getty Images

Mark Carney is set to only start increasing interest rates next year as Britain's level of inflation has stayed below the Bank of England's 2% inflation target.

According to the Office for National Statistics, the Consumer Price Index (CPI) measure of inflation, watched by the Bank, sank to 1.5%, down from 1.6%. This marks a continued decrease after inflation hit 1.9% in June.

Low inflation eases pressure on the Bank to hike interest rates as it mulls whether the economy is ready for borrowing rates to rise after the financial crisis. Meanwhile, the Retail Prices Index (RPI) measure of inflation, which includes housing costs, dipped to 2.4%.

Jeremy Cook, chief economist at the currency exchange company, World First, said: “For all the chatter, guesswork and prophecy around possible rate hikes in the UK, inflation is currently sat at a five year low.

“For a central bank mandated for inflation targeting and price support, this means that the Monetary Policy Committee will be able to lean on the slowing price outlook in a bid to keep policy as is for a little while longer."

Labour, meanwhile, welcomed the further fall in inflation but warned that it still outpaced the rate of pay growth and so "the squeeze on working people continues".

Carney suggested last week that the Bank would start to raise interest rates from next spring as wages finally start to rise next spring, stressing that rate-setters would "need to see the prospects of wage growth coming in".

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The Bank, he said, was "closely monitoring pay settlements" as a "leading indicator" of whether the economy was able to withstand an interest rate hike.

The timing of the first interest rate rise, which would raise rates from the emergency low which has been in place since 2009, has caused controversy as it would push up the cost of borrowing and pile pressure on mortgage holders and businesses.

The governor said the Bank expected workers to enjoy wages rising faster thain inflation "around the middle of next year", explaining: "Productivity growth should pick up bringing the higher, sustainable pay rises that British workers deserve."

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Carney speaking at the TUC Congress

Carney's speech comes after the Bank voted to keep interest rates at their historic 0.5% low, amid mounting pressure on them to raise rates as the economic growth has taken hold.

It remains to be seen how decisively the Bank voted to keep interest rates low in its latest meeting, as minutes from the meeting will be released later in the month. The Bank's decision means that interest rates have been at their longest period without change since Clement Attlee was prime minister.

Last month it emerged that two of the Bank of England's rate-setters backed a rise of 0.25% from the historic 0.5% low, arguing that it could be done without putting the economic recovery at risk.

Ian McCafferty and Martin Weale, members of the Bank's Monetary Policy Committee, felt that "economic circumstances were sufficient to justify an immediate rise", according to newly published minutes from the committee's meeting in August.

This marked the first split vote among Bank rate-setters under governor Mark Carney, as the pair were out-voted by the other seven members of the committee to keep interest rates at their current level. The last time Bank rate-setters were divided over whether to increase interest rates was in July 2011.

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