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Low inflation no reason to postpone rate rise - IoD

19 Aug 2015

Responding to today’s inflation figures which showed CPI inflation running at 0.1 per cent, and the RPI inflation measure, which will be used to set the maximum increase in regulated rail fares, at 1.0 per cent, James Sproule, chief economist at the Institute of Directors, said:

“Business, consumers and rail passengers will cheer this month’s low inflation figures. A temporary period of low inflation is contributing to the UK’s competiveness and underpinning strong economy performance. As the prices of commodities fall, businesses have the opportunity to spend a little less on raw materials, energy and transport, and a bit more on hiring staff, giving pay rises, paying down debt and other investments.

“It is important that a low headline rate of inflation does not stand in the way of normalising interest rates. Core inflation has hit a five-month high and the Bank of England expects inflation to return to two per cent over the next few years. Combined with strong wage growth, low unemployment and improving productivity, the UK economy is in good health. In such circumstances, it makes no sense for interest rates to be at a historic low.

“The decision on when to raise interest rates is always as much art as it is science, and the Bank of England is looking at a blank canvas. Rates have been at 0.5 per cent for more than six years, and millions of new businesses, homeowners and investors have never known a period of rising rates. Therefore, it is right that Mark Carney has committed to increasing them at a “slow and gradual” pace. The sooner he acts, the more able he will be to keep the course of rate rises in check.”

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