Even as the Office for National Statistics (ONS) revealed inflation beat pundits’ predictions and hit 2.9% in May, dwindling economic activity suggested the chances of the central bank adjusting its position on rates looked slimmer than ever.
Commentators had expected inflation to hit 2.7% last month, but the actual figure surprised markets by touching its highest level since April 2014.
Industry consensus shows many believe inflation could hit 3% or more before the Bank of England (BoE) feels compelled to act and with only one Monetary Policy Committee (MPC) member, Kristin Forbes, in favour of a rate rise at the April meeting we may be in for a long wait.
No reason to raise rates
Ben Lord, manager of the M&G UK Inflation Linked Corporate Bond Fund, certainly saw no reason why the bank’s governor Mark Carney would increase rates from current historic lows.
"Many believe inflation could hit 3% or more before the BoE feels compelled to act"
He said: “With so little evidence of domestic inflation pressures, and with most inflation coming from ‘transient’ and exogenous forces, Mark Carney will look through CPI at 3%, 4% even 5% perhaps.
“In fact, if Brexit negotiations commence poorly, and if the government can’t get anything done without a workable majority and now with a viable and sizeable opposition, I would still argue that Carney’s last move at the helm may be in the looser direction.”
Viktor Nossek, director of research at WisdomTree in Europe, said the impact of a volatile sterling and a weakening UK economy meant the bank was unlikely to act soon.
“Combined with indications of economic activity weakening, as evidenced by both actual GDP and retail sales decelerating markedly against a backdrop of weakening business sentiment, the BoE is unlikely to tighten soon,” he said.
“It’s clearing the path for inflation to hit 3%”.