Falling CPI makes chance of a UK Interest Rate Rise unlikely

As highlighted in this morning’s post; Economic Releases for Tuesday, 5th May 2011; today sees the release of Interest Rate decision by both the Bank of the England and the European Central Bank. Whilst the BoE has been under considerable public pressure to raise interest rates these past months, its Governor Mervyn King has held fast in his belief that the inflationary pressures currently plaguing the British Economy are transitory in nature. Whilst inflation is undeniably high; the Consumer Price Index shows that inflation stands twice the BoE’s own targets at 4; King remains confident that austerity measures will see growth in prices slow.

King may well be correct. Earlier in the year, I myself had expected the BoE to grudgingly relent to public demand by raising Interest Rates in May. With CPI data now showing year on year declines from 4.4% in February to 4% in March however, it is looking increasingly unlikely that any decision to raise interest rates will follow.

Perhaps more important will be the attitudes and composition of the Monetary Policy Committee itself. Martin Weale has become seemingly less hawkish in recent weeks, whilst the current meeting of the MPC will be Andrew Sentance’s last. Both Weale and Sentance have become synonymous with calls for gains in interest rates in recent months. With Sentance no longer influencing the decision after May, Weale’s solitary voice is unlikely to see King’s determination shaken.

For now, any imminent decision by the BoE to raise interest rates seems unlikely. Assuming that the CPI continues to fall, it does however appear that Mervyn King’s assurances that inflation would be temporary may see him gather more support for holding off the decision until much later in the year.

Here’s looking to the next round of CPI data, due for release on the 17th May.