The debate concerning negative interests in the UK has now become “very real” after the UK Consumer Prices Index (CPI) 12-month inflation rate dipped to 0.8% in April from 1.5% in March, recording its lowest reading since August 2016 and putting it on course to hitting 0% in the coming months, according to market commentators.
Office for National Statistics (ONS) figures released this morning (20 May) show that CPIH, which also measures owner occupiers' housing costs, was 0.9%, down from 1.5% a month earlier, as the impact of lockdown affects goods prices across the economy.
The largest drag on the 12-month rate, according to the ONS, was a fall in energy and fuel pump prices largely owing to the collapse in oil prices, which resulted in a 0.35 percentage point reduction in the rate from the housing, water, electricity, gas and other fuels sector.
Meanwhile, rising prices for recreational goods partially offset falls elsewhere, contributing 0.51 percentage points to CPIH.
Raymond James European strategist Chris Bailey said that while talk of negative interest rates have been "doing the rounds" for some time, the inflation rate falling well below the target of 2% means "that debate has become very real".
He added: "All eyes now turn to the governor of the Bank of England's comments later today for signs of further action to boost economic activity.
"The BoE does have room to move, if it wishes, and governor [Andrew] Bailey has already laid out the red carpet for lower interest rates, so we can be sure it's at the front of his mind."
Close Brothers Asset Management head of investment services Robert Alster explained that the combination of the impact of the coronavirus pandemic, in addition to oil price pressure, will mean "suppressed spending" will continue to impact prices "and we may see inflation edge closer to 0% over the coming months".
He added: "An inflationary shock remains a risk with supply-side concerns not yet over and business continuity costs uncertain.
"The BoE will likely keep the option of further quantitative easing under review, especially if the cause of inflation is structural rather than a short-term depreciation of sterling ahead of Brexit."
Willis Owen head of personal investing Adrian Lowcock said the inflation figures "should be taken with a pinch of salt" as the impact of the pandemic means some components cannot be accurately measured, and investors should instead focus on whether the disinflationary pressures will last.
He explained: "Some, such as the oil price, are already recovering. The measures implemented by the UK government and BoE… are also likely to have some inflationary effect if demand returns.
"It is a tough balancing act for portfolios and it is not clear which conflicting force will win out over the next few years.
"The solution for investors then, is to prepare for both. Have some exposure to investments which will do well if we get disinflation, and some which will work if inflation returns with a vengeance."
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