Quotes from Danske Bank Markets:
- In line with our expectations, UK CPI inflation declined by 0.2 percentage points to 0.3% in January 2015 from 0.5% in December 2014 (Danske Bank: 0.3%, consensus: 0.4%). This is the lowest reading since the data series began in 1989. Based on an Office of National Statistics (ONS) model, inflation has not been this low since March 1960.
- In the Inflation Report published last week, Bank of England (BoE) lowered its short-term inflation forecasts significantly, mainly due to the lower oil prices. The BoE now expects inflation to stay low in the short-term but to pick up in the medium-term. Hence the Bank Rate could be raised despite the low inflation if the medium-term outlook calls for a tighter monetary policy.
- This supports the case for a rate hike this year. We currently expect BoE to hike at its August 2015 meeting. However, the low inflation is a downside risk to this forecast as it gives the BoE the opportunity to be more patient.
