My bold prediction this morning is there will be no interest rate rise in 2015.
Yesterday we saw the latest inflation forecast from the Bank of England.
Price inflation, which has been falling recently, is expected to go lower still in the near future. Dangerously low for the economy, quite possibly.
Their inflation forecast suggests the Consumer Prices Index (CPI) measure of price inflation is likely to fall below 1% at some point during the next six months.
This seems very likely, with CPI inflation currently sitting at 1.2% for the twelve months to September. It has fallen from nearly 2% only three months earlier.
No rate rise in 2015
In fact, inflation is not expected to reach 2% again for another three years. What does this mean for interest rates and the economy?
Interest rates are primarily there to control inflation; raising interest rates now would risk a spell of deflation – something which might only now be avoided through additional quantitative easing, and is undesirable for the economy.
In a period of deflation, consumers tend to defer their buying decisions, in the expectations they will be able to bag a bargain at lower prices in the future.
Any window for higher interest rates that might have been open for the Bank of England earlier in the year appears now to be firmly closed. Carney will not hike interest rates in 2015 if inflation is dangerously close to deflation.
“Carney will not hike interest rates in 2015 if inflation is dangerously close to deflation.” [tweet this]
Some potentially good news is wage growth is now ahead of price inflation, which makes us better off in real terms. It’s a close thing right now, with wage growth excluding bonuses up 1.3% in the three months to the end of September compared inflation of the same period of 1.2%.
This wage growth is however expected to accelerate over the next year, with a clear gap between wages and price inflation appearing.
An expectation of low interest rates and improved wages, combined with low price inflation, offers families an opportunity to implement a Financial Plan which delivers a meaningful and financially secure retirement.
