The Inflation Report from the Bank of England shows that inflation is at the lowest level since inflation targeting started twenty odd years ago, that it may turn negative into deflation sometime in the Spring and stay close to zero for the remainder of 2015 said Mark Carney at the Inflation Report Conference.
As a result the Governor of the Bank of England has written an open letter to the Chancellor, George Osborne, to explain why inflation is ‘so low’ and what the Monetary Policy Committee intends to do about it.
Mr carney also said that he expected to be writing a few more such letters to the Chancellor over the coming months.
But Mr Carney went on to say that modest global growth would continue due to three factors; firstly the halving of oil prices, secondly the use of stimulus by central banks and thirdly the reduction in global real interest rates.
Helal Miah, investment research analyst at The Share Centre, explains what it means for investors.
“In its statement this morning, the Bank of England said that it expects inflation to turn negative in the coming months, mainly due to the plunge in oil prices. Furthermore, it does not predict that inflation will reach the 2% target until 2017. However, as a result of the UK economy remaining robust and predictions that oil prices will slowly recover to $70 a barrel, investors should note that it believes deflation will only be temporary and inflation will pick up in the second half on 2015.
“On the back of this news and Marc Carney’s comments seeming slightly more hawkish than in the past, sterling has made modest gains suggesting that the first interest rate rise may happen a little sooner than markets had anticipated but still around early 2016.”
“It does seem however, there is a risk that low inflation could last longer than predicted. In this scenario, the Bank of England will look to provide support to prices if low inflation became self-supporting. As a result, there may be the possibility of it boosting QE further or cutting the benchmark interest rate.
“This inflation report does not signal any major changes from what we already knew. Therefore, in this environment we feel that the equity market still represents the most attractive asset class for investors. This is due to good real incomes and the prospect of capital growth, as the economy continues along the path to recovery.”
Gautam Batra, Investment Strategist at Signia Wealth, commented:
“Today’s report may warn of deflation coming over the horizon, but as a symptom of low oil prices, the impact will be transitory.
“All indications from the Bank of England suggest a lift off in interest rates from a shorter runway than the market currently expects. Rising wages and lower unemployment point to a resilient economy, and by downplaying risks from general elections and Europe, it seems monetary tightening may come sooner rather than later.”
Nick Dixon, Investment Director at Aegon UK, said:
“The Bank of England may not be showing much concern over stalling inflation, as low food and oil prices are generally considered to be supportive of economic growth, but there seems to be grounds enough for the dovish members of the central bank to be even looking at an interest rate cut.
“The threat of deflation, together with sterling’s gains against the euro, have created an unexpected challenge for the BoE, and we could see a 0.25% interest rate, and even a reinjection of quantitative easing, before the year is through.”
Rain Newton-Smith, CBI Director of Economics, commented:
“While the risk of deflation is growing, it is unlikely that we will see falling prices for a prolonged period, as the pressure from lower oil prices unwinds ahead.
“Falling oil prices have knock-on benefits to the wider economy for companies and households, but the North Sea oil industry is being hit hard. As an immediate step, the Government should announce a commitment to reduce the Supplementary Charge in the Budget.
“With the Monetary Policy Committee alert to the risk of low inflation becoming entrenched, a rise in interest rates anytime soon seems off the cards.”
TUC General Secretary Frances O’Grady said:
“This forecast should be a wake-up call to government. The Chancellor has already delivered the slowest recovery in British history along with dramatic falls in living standards. Deflation would be no surprise in Britain’s slow growth, low pay economy, and would pose real risks to future growth and living standards.
“Responsibility for stabilising inflation cannot be left to the Bank alone. The government must come up with a credible plan to get wages rising faster. And the Chancellor should stop threatening the economy with the biggest austerity package in the developed world.”