Rates rise looks unlikely as inflation fears evaporate

PUBLISHED : Wednesday, 15 July, 1998, 12:00am
UPDATED : Wednesday, 15 July, 1998, 12:00am

Inflation looks to have peaked after a surprise fall in the key underlying rate to 2.8 per cent, its lowest level for three months, was recorded for last month.

The figures were immediately seen as lessening the likelihood that the Bank of England would need to raise interest rates further and showed it appeared to be finally approaching the 2.5 per cent inflation target set by the government when it took office last year.

Economists said the fall would add fuel to the calls for a halt in interest-rate rises but cautioned investors to wait for national average earnings data, which was set to be released today.

Headline inflation was down to 3.7 per cent, from a 4.2 per cent peak in May, while underlying inflation - which excludes mortgage interest payments - was down 0.1 per cent.

The so-called RPIY measure, which measures inflation after stripping out tax payments and mortgage payments - and comes under close scrutiny from the Bank of England - was down to just 2 per cent year-on-year.

Much of the easing was due to a slowdown in rampant house prices and a reduced rise in food prices. Wet weather during the summer months meant summer crops such as lettuce saw lower demand, which served to cap food-price rises, economists said.

Shares on the London Stock Exchange soared on the news, as traders noted fresh demand for equities on the expectation that interest rates would be kept on hold.

The FTSE-100 index of London shares hit a two-month high jumping over 100 points, or 1.7 per cent, and HSBC Holdings gained over 1.8 per cent to 1,559 pence.

Interest rate futures also rose in expectation an interest rate rise was not imminent.

The inflation appeared to vindicate the Bank of England's decision not to raise rates last week, and the evidence of falling prices comes as the British Chancellor of the Exchequer Gordon Brown is poised to announce spending targets in the economy for the next three years.