The September inflation rate was just low enough to spare Bank of England (BoE) Governor, Mark Carney, from having to write to the Chancellor and helped spur the first interest rate rise in a decade.
Every year the Chancellor of the day gives the BoE an inflation target to meet and ever since Gordon Brown changed the inflation index used to the Consumer Prices Index (CPI), that target has been 2%.
The BoE is given a leeway of 1% and, accordingly, provided the annual CPI figure is between 1% and 3%, it is deemed to be meeting this target.
However, if either boundary is crossed, the Governor must write a letter to the Chancellor explaining why inflation is off target – the 3 months’ later the Governor has to repeat the process, unless inflation has returned to its allotted pathway.
Many Economists thought that last month Mr Carney would be picking up his pen to explain to Mr Hammond as to why inflation was running at over 3%. Of course, it wasn’t his first letter as the graph above illustrates – he has had to exercise his literary skills in explanation of a sub 1% rate with the last of those missives despatched at the end of 2016.
And that’s not likely to be the end of it …
In the recent event, Mr Carney’s pen remained in his jacket pocket – but only by the thinnest possible margin as CPI hit 3%.
Even the Governor himself now thinks that the next CPI number will see his letter-writing resumed. That is one reason why the Bank decided on a 0.25% interest rate increase at the beginning of November. What happens next is less clear. The Bank expects inflation to decline gradually as the impact of the pound’s post Brexit fall disappears from annual comparisons. However, the Bank’s latest Quarterly Inflation Report sees inflation only back at close to 2% by mid-2020, ‘trained’ on a gently rising path of Bank interest rates.
The November rate increase was accompanied by a statement that the “any future increases in Bank Rate would be expected to be at a gradual pace and to a limited extent”.
In other words, if you are hoping that deposit interest rates are going to catch up with inflation, you could be in for a long wait. If you are holding larger sums on deposit than required for your rainy day needs, then come and talk to us about other options.
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