With the inflation rate falling to 1.3% in December, down from 1.5% in November, will the new Governor at the Bank of England have to consider an interest rate cut as one of his first acts?
The drop to 1.3% puts inflation 0.7% below the Bank’s target rate (2%) and is the lowest level it has been for over 3 years. Set against a sharp fall in retail sales in December, the markets are suggesting a drop in interest rates could come as soon as the January meeting of the Monetary Policy Committee (MPC). But outgoing Governor Mark Carney may not want to take such a drastic decision with just weeks left in the job and may believe it is up to the incoming Governor, Andrew Bailey, to provide his own guidance on long term fiscal policy.
Retailers, food stores in particular, and the Office for National Statistics (ONS) are reporting that retail sales volumes were down 0.6% in December, marking the fifth month in a row without growth on the High Street. Much is being made of the impact Black Friday had on Christmas trading but with food retailers stating that sales were only in line with 2016 figures, it is clear that it is not just consumer goods creating the issue.
Traders are suggesting that the chances of an interest rate cut, even if just one-quarter-of-a-percent, are as high as 60%, but they are currently unwilling to put a date on when it will happen, given the impending change in leadership. The current interest rate sits at 0.75% and has only moved by 0.25% either way in more than a decade. Between mid-2016 and the third quarter of 2017, the interest rate dropped to 0.25% but has otherwise remained around 0.5% for many years. The MPC sits on Thursday 30th January and may decide to cut rates at that point, just 24 hours before the UK leaves the EU – seen as the next economic hurdle the Bank will have to contend with.