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Slip in cost of living

Inflation dip may not halt interest rate rise

Money - own picA fall in inflation from 3% to 2.7% in February may not be enough to prevent the Bank of England raising interest rates in May, say analysts.

Tom Stevenson, investment director for personal investing at Fidelity International, said: “Inflation is easing from its recent peak of 3.1%. February’s reading of 2.7% was slightly lower than expectations and 2.5% for underlying inflation is in line with forecasts.

“As the post-referendum currency effect fell out of the year on year comparisons, price rises were always likely to ease back. The recent rise in sterling has accelerated the trend.

“Attention will turn now to the Bank of England’s rate-setting decision on Thursday. With inflation still above the Bank’s 2% target, we should expect the monetary policy committee to raise the base rate from its ‘emergency’ level in due course. This is unlikely to be this week but a May hike now looks odds on.

“Although the Bank now joins the Federal Reserve on a tightening bias, rate hikes will be lower and slower as long as the UK economy faces the uncertainty of the ongoing Brexit negotiations. The agreement of a 21 month transition this week is a step in the right direction but there remain many unanswered questions. Because of this, the Bank will stay cautious and the gap between US rates and those in the UK will widen.

“For savers and investors this means that cash and safe fixed income investments will continue to offer paltry returns. With the UK stock market yielding around 4% and valuations lower here than in other developed markets, investors are likely to favour equities for the foreseeable future.”

Sebastian Burnside, senior economist with Royal Bank of Scotland, said: “The big question is what the Bank of England will make of all this. 

“The Monetary Policy Committee has said it expects to need to raise interest rates to bring inflation back down to the 2% target.

“One month’s data showing a fall in the inflation rate won’t dissuade the committee of that view.  But if tomorrow’s wage data is weak as well some will feel we’d be better off waiting.”

David Lonsdale, director of the Scottish Retail Consortium, said: “Family finances continue to be under strain and disposable incomes do not stretch as far as they used to as inflation continues to outstrip wage growth.

“Scottish households will see their finances tested further from next month onwards as rises in income tax, council tax and statutory minimum pension contributions kick in. This is likely to cause shoppers to carefully consider what purchases they can afford.” 


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