Low inflation heads off interest rate rise

The prospect of an imminent rise in interest rates receded further today, as figures showed inflation slowed to its lowest annual rate in more than 40 years in December.

Headline inflation, which includes mortgage interest payments, fell 0.2% to 0.7% last month, after tumbling a surprising 0.7% in November, the office of national statistics reported.

The December figures came just a day after the Bank of England governor, Sir Edward George, suggested there would be no immediate rise in interest rates.

The underlying rate of inflation, which excludes mortgage payments, edged up 0.1% to 1.9% because of upward pressure from food prices following the cold weather in December.

Philip Shaw, an economist with Investec, said: "The figures confirm Sir Edward's comments overnight that interest rate increases are not on the cards."

There had been speculation that the Bank was considering raising rates to cool off the spending boom. Retail figures over the festive season showed that retailers enjoyed their best Christmas in five years. Interest rates of 4% stand at their lowest level in 37 years.

But Sir Edward yesterday signalled that an early interest rate rise was not on the cards.

Sir Edward's speech to the national institute of economic and social research clarified the Bank's stance, after earlier statements on the need for higher rates to curb consumer spending.

He said: "I do not suggest that the timing of any such move is imminent."

Last month's underlying inflation rate of 1.9% showed that strong consumer spending has yet to lead to higher prices and is well below the target of 2.5% set by the chancellor, Gordon Brown.

As well as an increase in some seasonal food prices, products such as soft drinks and some meats were more costly than last year, the ONS said.

There were also small upward effects from clothing and footwear, while there was less discounting in the women's fashion sector this year.

However, motoring costs were cheaper during the month, as increases in some car insurance premiums weighed in less than last year. Lower oil prices have already contributed to the weak inflation picture over recent months.

As recently as August, the underlying rate of inflation rose to a two-year high of 2.6%, but fell back to 2.3% in September.