Inflation figures unlikely to prevent interest rate cut if growth takes a turn

BRITISH inflation remained above its 2.5% target for the third month in a row in January, but this is unlikely to prevent the Bank of England cutting interest rates again if growth takes a turn for the worse.

The Office for National Statistics said that retail prices, excluding the cost of home loans, RPIX, fell by 0.1% on the month, keeping the annual rate at 2.7%, the same as in December but higher than market expectations of 2.6%.

Financial markets barely flinched. Interest rate futures edged lower initially as dealers bet that at the margin the higher than expected figures reduced the chances of another interest rate cut but soon recouped their losses.

Analysts said the BoE, which cut interest rates to a 48-year low of 3.75% this month, is more concerned with the prospects for weaker growth and has already predicted inflation would rise further above its target in the short-term.

“I don’t think the BoE will react to it at this point. They will play this down. They will say these are essentially short-term effects that are likely to unwind,” said Ross Walker, economist at RBS Financial Markets.

Last week, the BoE predicted that RPIX would rise further toward 3% before falling back down at the end of the central bank’s two-year forecast horizon as the effects of higher oil and house prices subside. The headline rate of inflation, RPI, also remained steady at 2.9%.

The ONS said the main upward contributor to inflation in January was clothing and footwear prices as many retailers started slashing their prices in December so January sales reductions were not as steep as usual.

“In fact the discounting was less than any January sales period since 1990,” said John Butler, UK economist at HSBC Markets.

“Ultimately, the trend in clothing discounting began earlier but total discounts over the past two months are in line with last year, no more, no less.”

Motoring costs also pushed inflation higher in January as petrol prices surged in response to the threat of war in Iraq. Petrol and oil prices rose 7.2% on a year earlier, the fastest rate since December 2000. But working against that were lower food prices. Seasonal food prices fell 7.7% on a year ago as sharp increases a year ago because of bad weather were not repeated.