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Has Carney closed the door on early-2015 base rate hike?

The Bank of England could hold off raising interest rates until the end of 2015 after revealing a dip in inflation expectations, experts say.

The Bank’s latest inflation report, published this morning, suggests Consumer Prices Index inflation is likely to fall below 1 per cent at some point over the next six months.

CPI fell to 1.2 per cent in September, down from 1.9 per cent three months earlier, reflecting declining food and energy prices during the period.

Schroders european economist Azad Zangana says: “Mark Carney delivered a cautious outlook when presenting the November inflation report – suggesting that interest rates could be kept unchanged until the end of 2015.

“The BoE downgraded its forecast for inflation in the near term in response to falling commodity prices, and warned that headline inflation could fall below the 1 per cent lower target band, which would trigger a letter from the Governor to the Chancellor of the Exchequer.

“Despite the fall in commodity prices likely to have only a temporary effect on inflation, Carney and the committee appear to be taking a dovish stance.”

Kames Capital head of multi-asset Scott Jamieson says “the door has all but closed” on the Bank’s opportunity to lift base rates.

“As the latest quarterly inflation report makes clear: ‘inflation is expected to remain below the target in the near term, and is more likely than not to fall temporarily below 1 per cent at some point over the next six months’,” he says. “This represents a material change from the QIR released in August, and validates the downshift seen in market implied inflation rates.

“The problem, it seems, is everyone else. While UK domestic demand has strengthened, the external outlook has weakened; the Europeans being most to blame. The slide in oil prices has added to the downward pressure on overall prices, with the fillip to consumer spending yet to be very evident.”

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  1. The primary purpose of raising interest rates is to dampen inflation. With inflation already at such a very low level, a rate increase would risk deflation (not to mention problems in the mortgage market) which is worse than all but very high inflation. Carney has no room for manoeuvre so the rate is going to have to stay low until inflation starts to creep up.

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