Pressure on interest rates eases as inflation falls below 2%

February 18, 2014

Inflation in January fell to 1.9%, official figures released this morning show – the first time it has been below the important 2% level since 2009.

The rate, as measured by the consumer prices index, was down from 2% in December. The surprise fall – most economist expected it to stay level – could ease further pressure on the Bank of England to raise interest rates. Bank governor Mark Carney last week said he will look at a number of factors in deciding the next move in the cost of borrowing. He had previously indicated that the rate would be reviewed when the unemployment rate reached 7%.

However, a faster-than-expected decline in joblessness has prompted the Bank to look at other measures. Despite today's fall in inflation, house prices are still rising rapidly.

The fall in inflation resulted from price movements in recreational goods and services, furniture and household goods, and alcoholic beverages and tobacco.

Inflation as measured by the Retail Prices Index rose to 2.8% in January from 2.7% in December.

Phil Smith, managing director at Business West, which runs the Bristol Chamber of Commerce and the Bristol Initiative, welcomed the fall in inflation, saying it was very good news for West businesses and consumers and would strengthen the case for the Bank’s revised forward guidance policy that an early rise in interest rates was neither necessary nor likely.

“An economic environment of low inflation and low interest rates allows people and firms to plan ahead, as they can be confident they will not encounter any unwelcome surprises,” he said.

“The economy still faces many challenges, and every effort must be made to bolster the recovery. But since our current forecast suggests that inflation will remain at around the 2% target, it is now up to the Chancellor to use next month’s Budget to implement measures to boost enterprise and wealth creation.”

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