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UK inflation down, but when will interest rates go up?

The Office for National Statistics released inflation data for March this morning, showing that the Consumer Price Index (CPI) had fallen since February;  1.7% to 1.6%. The may contributors to this fall were from the costs of transport and food, with a small impact from clothing and household goods.

The full ONS CPI release for March

The Retail Price Index (RPI) grew by 2.5% in the year ending Mach 2014, down from 2.7% in February.

The macro release should be a positive for the consumer; however it is unlikely that the individual has really noticed the differences. The squeeze on the pocket seems to continue, with wage growth only now returning following the financial crisis.

When will the Bank of England raise rates?

Analysts’ views vary as to when the BoE will be forced to raise rates, however with inflationary pressures easing; the biggest contributor to the decision is likely to be “housing bubble”. There is concern that if the BoE continues to keep benchmark rates at 0.50% this will add fuel to the increases in house prices, which will squeeze borrowers when rates do return to normal levels.  Expectations for tightening to start in 2015, however bets are at a 3 year high that the BoE will be forced to raise rates sooner has pushed sterling to a multi-year highs.

Initially Sterling fell in the FX markets on the inflation release, but the accompanying housing release from the ONS stated “annual house price increases in England were driven by rises in London (17.7%), the South East (8.0%) and the East of England (7.7%).”  This put a bid back into Sterling, as traders are betting there will be rate rise sooner than outlined in Mark Carneys Forward Guidance. 

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