Interest rates will not increase in 2014 – Bank of England
20/08/2014
The Bank of England has confirmed that interest rates will remain at the benchmark low of 0.5% for the remainder of 2014.
There has been speculation in recent months that interest rate rises would be enforced as the economy continues to recover, however a fall in inflation has eased any pressure on the Bank to increase their rates in the near future.
Inflation, as measured by the consumer prices index (CPI) fell to 1.6% in July, down from 1.9% the month before. Analysts had expected inflation to fall in July, but they only expected it to fall as low as 1.8%, meaning that increases in the cost of living had slowed down faster than expected.
The reduction in inflation is largely down to summer sales and a supermarket price war, which meant the costs of commodities such as food and clothing actually fell.
However, despite inflation appearing to be under control, wages are still failing to keep pace with the cost of living. In the three months to June, total weekly earnings were 0.2% lower than the same time period last year, which is the first fall in wages since 2009. It is for this reason that Mark Carney, governor of the Bank of England is aiming to keep interest rates low until wages start to rise in line with inflation.
Significant surprise
Whilst inflation has been at or below the Bank of England’s target rate of 2% for eight consecutive months, this large fall came as a surprise to many.
Liz Martins, an economist at HSBC said that the news supported the case for not increasing interest rates.
Martins added: “Given that the [Bank of England’s] expectation was for CPI to stay at 1.9pc, this downside surprise is significant, and could influence members’ thinking on policy in the near term.”
Martin Beck, a senior economic adviser to the EY ITEM Club supported this argument that there appears little reason to increase interest rates in the short-term. He said: “Against such a benign inflation backdrop, and with encouraging signs that the housing market is coming back under control, there appears to be little immediate pressure on the Bank to raise rates”.
However, whilst items such as food, clothing and alcohol have decreased in price, some have increased. For example, the cost of transport increased by 0.07% in the month of July alone, and this is set to increase further still, as rail fares are to be increased by 3.5% this year.
This increase in rail fare prices is because the rail companies use the retail prices index (RPI) to set fare increases. RPI is a much broader method of measuring inflation, and is set at 2.5% for July. Additionally, when this is used to calculate price increases for rail tickets, a formula of RPI + 1% is used, meaning in this instance ticket prices will increase by 3.5% for the year.
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