The Bank of England is unlikely to raise the base rates until November as the bank will continue to ‘look through’ low inflation and focus on the outlook for 2017, EY Item Club said in its Winter forecast on Monday.
The extended delay in raising interest rates and unwinding quantitative easing could also leave the Monetary Policy Committee short of ammunition to deal with an adverse shock, the think-tank said.
The fall in oil prices, coming on the back of the persistent declines in industrial, food and other commodity prices is expected to subdue the bounce-back in inflation next year, making it difficult for the BoE to follow the Fed in raising interest rates.
The economy’s slowdown in both real and nominal terms is another reason to expect a further period of unchanged interest rates, Item Club said. The Bank Rate is likely to reach only 1 percent by the middle of 2017 and end next year at 1.5 percent, the firm added.
The major beneficiary of low inflation and interest rates are consumers and Item Club expects consumer spending to rise 2.8 percent this year, very similar to the likely outturn for 2015.
According to Item Club, UK households look to be in a better position to face an interest rate rise when it happens.
Consumers will see a big increase in their disposable incomes as the new National Living Wage of GBP 7.20 comes into effect this April.
Economic growth is expected to pickup to 2.6 percent from 2.2 percent in 2015. But inflation and austerity will return in 2017, slowing growth to 2.3 percent in 2017 and then to 2.2 percent in 2018, Item Club said.
Inflation is seen at just 0.7 percent this year. But it is expected to more than double next year to 1.6 percent and 1.8 percent in 2018.
Low inflation and interest rates are helping the Chancellor, but reflect the risky global outlook which may yet impact the U.K. and the fiscal figures.
House price inflation is forecast to ease to 6.5 percent this year, before weaker household income growth causes a slowdown to 4.5 percent a year in 2017-18.
Exports are forecast to expand 4 percent in 2016 before improving to 4.8 percent in 2017. Likewise, growth in imports is seen rising to 5 percent next year from 4.3 percent in 2016.