Plunging oil prices needn’t keep BoE rate setters awake at night

Plunging oil prices may not lead to a huge fall in overall UK inflation, and so are unlikely to stay the Bank of England’s hand when it comes to raising interest rates.

That’s the message in the latest research from Pantheon Macroeconomics’ chief UK watcher Samuel Tombs and it comes as the international Brent crude benchmark falls to around $40 a barrel, from $50 just a month ago.

Tombs’ point is that while changes in oil prices feed through “quickly and mechanistically” into the price of petrol, they have much less influence elsewhere. Bluntly, firms are reluctant to pass on savings they make on input costs such as oil when signs of resilient consumer demand suggest they don’t have to.

“Airfares, for instance, have increased by nearly 10% over the last year, rather than falling by the 10% implied by their previous relationship with oil prices,” Tombs writes.

Moreover, while oil prices have fallen, sterling has slipped too. The pound’s slide to the $1.50 area from $1.54 in the past month will make imports to the UK more expensive and provide an inflationary offset to oil-price weakness.

None of the above is to suggest that oil will never fall to the point where Bank of England rate setters have to worry about them, however.

Of course they might.

“A further plunge in oil prices to below $30 probably would keep consumer price inflation below 1% and likely would persuade the [Monetary Policy] Committee to stand pat for a few more months,” Tombs goes on.

“But the MPC would then have to raise interest rates more quickly than they otherwise would have done, as lower crude prices will have little bearing on inflation or interest rates two to three years out.”

In Pantheon’s view then, the renewed fall in market interest rate expectations over the last few days in response to the fall in oil prices does not look entirely warranted.

Original article published by news.markets: http://news.markets/bonds/plunging-oil-prices-neednt-keep-bank-of-england-awake-at-night-6392/