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What next for inflation and interest rates?
The surprise fall in the consumer prices index has diminished the chances of a rate rise, according to markets.

The headline rate of inflation in the UK fell today. That provides a little comfort for savers who in April saw their nest egg eroded by prices at an annual rate of 2.4pc in April rather than the more painful 2.8pc of damage in February and March.

Peversely, a decrease in price pressure makes an increase in the UK Bank Rate even less likely - so still more bad news for savers.

What next for inflation?

The main reason for the fall in CPI, according to the ONS, was a sharp fall in the cost of petrol and air fares with the "only notable upward contribution" from food.

Samuel Tombs, UK economist at Capital Economics, said: "Inflation still looks set to climb again in the coming months as we reach the anniversary of a period of falling petrol prices and deep discounting on the high street. However, the peak, probably in June, could now be closer to 3pc than the 3.5pc we had expected beforehand.

"What’s more, underlying price pressures still look subdued. Indeed, today’s producer prices figures showed that output price inflation fell from 2pc to 1.1pc, its lowest rate since September 2009. And growth in pay and credit has been very weak for some time. Accordingly, while the squeeze on households’ incomes from inflation will still intensify in the coming months, we continue to expect this pressure to ease further ahead."

Russ Koesterich, chief investment strategist, at BlackRock said: "One of the questions being asked by many investors is when will inflation rear its head. With the Federal Reserve keeping interest rates so low for so long, there has long been an expectation among many that inflation will be rising.

For the past several years, however, inflation has remained contained and our expectation is that the inflation environment is unlikely to change any time soon. The bottom line is that with the economy still in the midst of a fragile recovery and with long-term headwinds keeping prices down, inflation is unlikely to become a problem for at least another 12 to 18 months.

But yesterday the Ernst & Young ITEM Club forecast that UK inflation would settle at 2.6pc in 2014 and 2015 rather than fall back to 2pc by early 2015, as the Bank of England has predicted.

When will interest rates rise?

The latest forecast for the Bank Rate will soothe the nerves of borrowers, but is the last thing beleaguered savers want to hear.

The Bank of England’s quarterly Inflation Report, published last week, acknowledged that markets were predicting the first increase for late 2016. The last report, in February, indicated the late summer of 2015.

But markets and the vast majority of economists have been wrong in their estimates during much of the financial crisis. Despite the turmoil in early 2009, when the Bank Rate was cut to 0.5pc, the consensus opinion was that the Monetary Policy Committee (MPC) would order a rise again within the year. Even by the spring of 2011, the market expected 1pc before the end of that year and that Bank Rate today would be moving toward 2.5pc. Predictions, therefore, should be treated with caution.

The debate centres on whether low rates and the £375bn quantitative easing programme have done their job and ignited a recovery, which is as yet difficult to measure. Andrew Sentance, a former MPC member, this week said rates should already be at 2pc because money printing had created too much inflation.

The flip side of the argument is that the towering debt and rapidly ageing population of Britain mean it is following Japan’s path and entering a long battle with deflation. Rates in Japan, which is 20 years ahead of Britain in demographic and debt terms, have been kept below 1pc since 1995 in a failed attempt to reinflate the economy.

Of course, mortgage and savings rates have a degree of independence from the Bank Rate. They are also affected by how banks can access credit and attract deposits elsewhere.

In the short term, consumers should expect further falls in mortgage and savings rates. The Budget in March promised to extend the Funding for Lending Scheme by a year, until January 2015. The scheme has the effect of making mortgages cheaper but it also batters the rates on cash Isas and other savings accounts. Expect more of the same.

Swap rates, it should be noted, moved dramatically at the publication of the inflation figures today, underlining what a shock it was to markets.

These "swaps" are traded by financial instiutions borrowing money from each other over fixed time periods. One reason is to finance lending on fixed-rate mortgages, which in turn influences fixed-rate savings pricing.

Today, one-year swaps dropped from 0.64pc to 0.57pc, two-year swaps fell from 0.67pc to 0.57pc and five-year plummeted from 1.19pc to 0.89pc, according to Bloomberg data.

They mounted a partial recovery in the afternoon - most notably the five-year swap rose back to 1.07pc - but it underlines the impact of the inflation figures and the fact that the market will now be pricing an even longer wait for rates to rise than the graph - based taken on trading in late April and early May - suggests below.

It is also worth noting that if swap prices may and hold, it can alter the pricing of new fixed rate mortgages and savings in the weeks that follow.

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