Interest rates are not expected to rise until next year following the sharp fall in inflation to 1.6 per cent.
UK inflation fell to from 1.9 per cent in June to 1.6 per cent in July, prompting economists to rule out an increase in interest rates for the rest of the year.
HSBC economist Liz Martins told the Daily Telegraph: “The data support the case for rates to go up later rather than sooner. Given that the [Bank of England’s] expectation was for CPI to stay at 1.9pc, this downside surprise is significant, and Economists argue low inflation, together with downside risks from the eurozone, mean rate rises this year are “no longer in play”.
EY Item Club senior economic adviser Martin Beck said the “only fly in the ointment” was a potential bubble in the housing market, but added this pressure seemed to be easing off.
He said: “Against such a benign inflation backdrop, and with encouraging signs the housing market is coming back under control, there appears to be little pressure on the bank to raise rates.
The drop in inflation comes as MPs prepare to question Bank of England governor Mark Carney over claims he has a pact with the Chancellor to keep rates low ahead of next year’s general election.
The Bank of England’s Monetary Policy Committee will set out its thinking on interest rates later this morning when it publishes the minutes from its meeting earlier this month.