In April the ONS reading for CPI was that UK prices had gone down (deflation). In the height of the recession inflation peaked at over 5%, significantly above the Bank of England’s 2% target. The governor at the time, Mervyn King would write a letter to the Chancellor explaining why inflation was overshooting the central banks remit. With inflation high and asset prices appreciating, some analysts believed that interest rates would need to be increased from the record low of 0.50%. The MPC held off increase interest rates and continued with its programme of quantitative easing.
Since then, inflation has continued to tick lower, finally going negative last month. Interest rates have been held at 0.50% for over 6 years, alongside QE, with asset prices, especially house prices appreciating. The concern is that current monetary policy could be the catalyst for a future shock, which unless the MPC votes to tighten, they will be left without any tools to stimulate the economy.
At the quarterly inflation report Carney highlighted that he believed the current low levels of inflation were transitory due to the sudden collapse in energy prices, but underlined that in 12 months’ time inflation would be near the bank’s target. Oil prices have since recovered from their year-to-date lows trading above $60/barrel. The latest reading from the ONS of 0.1% could be the turning point in the trend, for inflation to begin rising again. The ONS highlighted motor fuels as a key contributor to the reading.
The median expectation for the Bank of England to begin tightening is Q1 2016, as this is data dependent, a rapid increase in prices would likely lead to a rate hike being brought forward.