UK inflation edged up to a 12 month high in January 2016, coupled with a fall in petrol prices during the same period. Inflation, as measured by the Consumer Prices Index, rose by 0.3%. It was helped by smaller falls in food and fuel prices than the same time a year ago. Annual inflation has been below the Bank of England’s 2% target for two years now. The Bank of England said earlier this month that it expected inflation to stay below 1% this year.
North Sea oil prices have dropped to a 12 year low of $27.10 and have almost halved over the past 12 months, but the Office for National Statistics measure of fuels and lubricants costs was only 7.3% lower than in January 2015, the smallest drop since November 2014. Continuing low inflation makes the chance of an interest rate rise in the near future unlikely.
It is unlikely that the BoE will raise rates before late 2016 at the earliest, and some analysts see a risk that the BoE could instead cut rates to below the record low of 0.5% where they have been for almost seven years. Financial markets do not currently expect interest rates to rise until the end of the decade due to concerns including a global economic slowdown and continuing low oil prices.