Low inflation outlook pushes rates down

UK markets have pushed back their expectations for the timing of the first interest rate hike to the second quarter of 2015, even though the latest surveys suggest that the recovery has remained strong in Q3 and two members of the MPC are now voting to raise rates. Instead, markets seem to be rightly focussed on the outlook for inflation, which we continue to think could fall to as low as 1% by the end of the year in response to recent falls in commodity and import prices as well as stagnant unit wage costs. While that development may not prevent the MPC from raising interest at all next year, we think it will persuade them to only edge rates up. Indeed, our forecast for Bank Rate at the end of next year is 1%, still slightly below the present expectations of the markets and most economists.