Inflation Dive Boosts Hope of Keeping Low Interest Rates

Article excerpt

Byline: Hugo Duncan

INFLATION fell sharply last month, raising hopes that interest rates will stay at record lows until next year.

Official figures today showed the consumer prices index rate of inflation eased from a 14-month high of 3.5% in January to 3% in February.

It was the first fall since September and suggested that inflation has peaked and will head back towards the 2% target by the end of the year.

The drop in inflation -- and the prospect of a fall below target -- will alleviate concerns at the Bank of England about the recent spike. It bolstered hopes that the Bank's monetary policy committee (MPC) will leave interest rates at 0.5% for the rest of the year.

City economists also said the MPC was unlikely to start withdrawing the [pounds sterling]200 billion of emergency funding it has pumped into the economy through quantitative easing any time soon.

Howard Archer of IHS Global Insight said: "Inflation could very well be back under the target of 2% by the end of the year. It should help to ease recent concern within the MPC over the upside risks to inflation, and it reinforces our belief that the Bank will keep interest rates down at 0.5% through 2010. We do not expect the Bank to reverse quantitative easing until 2011. …