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Low Interest Rates Putting Economy at Risk

Sterling gained ground against the dollar and the euro as her comments reinforced expectations interest rates are heading higher in the months ahead.

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The price of oil is at a six-month low, with a barrel costing under $50.

However, falling prices for food and non-alcoholic beverages partially offset the rise.

The increase in the headline reading to 0.1 per cent from zero was due to clothing prices, with smaller discounts in the summer sales this year compared with a year earlier.

Year over, the numbers are as expected: 1.8% in core CPI and +0.2% in headline CPI.

With the US representing the largest importer of Chinese goods, any such devaluation would drive imported deflationary pressures, which could in turn lead to yet another reason for the Fed to hold off on a rate hike.

Core inflation, which strips out food, energy, alcohol and tobacco prices, hit a five-month peak of 1.2 percent, up from 0.8 percent in June.

The pound rallied after data on Tuesday showed that the consumer price index edged up 0.1% in July from zero the month before, compared to expectations for no change.

While low inflation has boosted Britons’ purchasing power, it has also made it more hard for the BoE to exit its ultra-easy monetary policy of recent years.

Inflation has risen in the recent term but is still below the Bank’s inflation target, particularly if the housing component of the CPI is excluded.

While economists had been expecting inflation to remain at zero for another month, the latest report from the Office for National Statistics (ONS) revealed it had edged up in July.

Schroders senior European economist Azad Zangana says the latest CPI figures “show signs of a healthy economy that is enjoying the dividends from lower global commodity prices”.

While the figures published on Tuesday were higher than what were foreseen, inflation still stays well below the Bank of England’s target of 2 percent. “Thereafter the path of rate rises is likely to be a slow incline, and it wouldn’t surprise me to see them stuck on 0.75% for some time“.

The Federal Reserve is expected to begin raising interest rates in the US this year, perhaps as soon as September.

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Writing in an opinion piece in the Telegraph newspaper, Forbes, a member of the rate-setting Monetary Policy Committee (MPC), reiterated BoE Governor Mark Carney’s view that the exact timing of a rate hike can not be predicted in advance.

The turning point in rates is coming'pretty soon, BoE policy maker David Miles has said