Rates 'likely to stay on hold

An interest rate rise next month is unlikely after today's surprise 0.1% fall in inflation, economists said.

A subdued inflation rate of 1.3% and continuing consumer caution in the high street should persuade the Bank of England to keep rates on hold until February, according to analysts, who said that the lower inflation growth would also be likely to increase downward pressure on rates later in 2004. One expert predicting that rates would not top 4.5% for the rest of the year.

The drop surprised economists, who were expecting a 0.1% rise on the back of the run-up to Christmas in the high street.
Chief economist at stockbroker Gerrard, Simon Rubinsohn, said the widely-held view among economists was that the Bank would next adjust rates in February, rather than January.

"We would not be surprised if the MPC chooses to wait a little longer before moving, particularly if the subdued inflation picture is sustained and the consumer continues to shun the high street," Mr Rubinsohn said.

Graeme Leach, chief economist at the Institute of Directors, said the Bank's long-range inflation forecast is a more significant factor in setting interest rates than monthly data. However, he added: "Today's figures lend support to the IoD's view that interest rates are unlikely to rise above 4.5% next year."

Today's drop in the consumer prices index - the government's new target inflation measure - means inflation has undershot the government's new target of 2% in every month since May 1998 and is at its lowest since the 1.1% seen in June this year.

Prices of clothing and shoes, particularly womenswear, rose by less than last year, when the rise in prices was greater than the seasonal norm, the Office for National Statistics said. Slower growth in prices of leisure items such as theatre tickets, games, toys, hobbies and newspapers also contributed to the downward trend.

But the cost of air travel, which fell by less than it did a year ago, was the main factor countering the downward pressure.
Changes in clothing and footwear prices were also the main reason why the government's former inflation measure, the Retail Price Index (RPI), fell this month.

The underlying rate of RPI inflation fell to 2.5% from 2.7% in October, and the headline rate, which includes mortgage interest payments, dipped 0.1% to 2.5%. The old inflation measure was expected to stay above the government's previous underlying target of 2.5%.

The Treasury has adopted the CPI, otherwise known as the Harmonised Index of Consumer Prices, as its inflation measure following a recommendation by the chancellor, Gordon Brown, in last week's pre-budget report.

The difference between the CPI and the RPI is principally caused by the absence of housing and council tax costs in the CPI figure.
The coverage of items in the new measurement is also different with fewer one-off effects included. The introduction of CPI brings the UK into line with the eurozone, which already uses it.