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March inflation fall: The effect on savers and investors

Wednesday 16th April 2014

Consumer Price Inflation fell to 1.6% in March – the third month in a row it has undershot the Bank of England’s 2% target and its lowest level since October 2009, Ben Brettell, Economics Editor at Hargreaves Lansdown shares his thoughts:
“Today’s figures confirm the complete absence of pressure on the Bank of England to raise interest rates. The Bank of England is now targeting the UK’s ‘output gap’ rather than unemployment. The Office for Budget Responsibility forecast this won’t close until 2018 – combined with continuing low inflation this gives Mark Carney plenty of leeway to keep rates low, and I don’t expect them to rise until mid-2015 at the very earliest.”
“If anything, deflation could be more of a threat than inflation. There is even an outside chance of further quantitative easing, though this looks unlikely unless we see further sharp falls in inflation over the coming months.”
“Today’s figures are a mixed blessing for savers. Inflation is eroding their capital more slowly than previously, but lower inflation also lessens the chances of deposit rates improving. The increase in Cash ISA allowance to £5,940 and then to a potential £15,000 in July should provide a little respite.”
“Lower inflation should be good news for stock market investors, however. Although equities are normally considered the asset class best-equipped to deal with higher inflation, the transition between low and high inflation can be painful for stock markets. A continuation of low interest rates should also be supportive for equities.”
Falling inflation is also positive for bond investors. Much has been made of the risk that higher interest rates and inflation could cause a sell-off in bonds. Lower rates for longer could postpone this.”

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Editorial Contact Details - Conor Shilling
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