Deflation returns as new Bank of England rate setter sounds growth warning

Gertjan Vlieghe burnished a dovish reputation as he stressed Threadneedle Street should 'wait and see' before raising interest rates for the first time since 2007

The Bank's Monetary Policy Committee voted 9-0 to keep rates on hold

The Bank of England’s newest rate-setter warned of “downside” risks to inflation as figures showed the cost of living slipping back into negative territory in September.

Gertjan Vlieghe, making his first public appearance before MPs on the Treasury Select Committee, burnished a dovish reputation as he stressed Threadneedle Street should “wait and see” before raising interest rates for the first time since 2007. The Monetary Policy Committee member added that inflation risks were “probably skewed to the downside”.

His comments came as September inflation figures showed year-on-year growth in the consumer prices index falling below zero to minus 0.1 per cent. This is the second time this year that the CPI has turned negative and equalling the lowest rate of inflation since March 1960. It means a basket of goods which cost £100 in September last year cost £99.90 last month.

The September inflation rate is also generally used by the Government to uprate benefits for the following fiscal year. As a result, people claiming an array of benefits including disability and care allowances could receive no increase next April. However, the state pension will increase by 2.5 per cent due to the Government’s “triple lock”.

Mr Vlieghe – who worked at the Bank of England before joining hedge fund Brevan Howard – stressed that “one major risk is that global growth continues to disappoint”, striking a more downbeat tone on the potential impact of emerging market turmoil than Bank Governor Mark Carney. “It is one of the things that will prevent the UK economy from accelerating meaningfully” from its current pace of growth, he warned.

The economist was at the centre of controversy in the summer when it emerged that he was allowed to keep a stake in Brevan Howard, where traders bet on interest rate moves. He later severed all links with the firm to avoid “any mistaken impression” of conflict of interest. He told MPs he was in line to receive a “couple of hundred thousand pounds” from the sale.

Financial markets do not expect Threadneedle Street to raise rates until 2017 although the MPC has so far looked past the plunging commodity prices driving the steep fall in inflation. Minutes of the October meeting said last week that the Bank did not expect the benchmark to return to 1 per cent until next spring.

The latest slide in the CPI was driven by a 3.7p fall in the average cost of a litre of petrol as well as British Gas’s 5 per cent price cut for 6.9 million customers, which took effect at the end of August.

Clothes shops also held more sales than usual to shift stock after an unusually wet August, and food prices are down 2.5 per cent on last year as supermarkets battle for shoppers. The pound sank against the dollar on the weaker than expected reading.

But economists stressed that the UK’s current bout of falling prices is short-lived “good” deflation rather than the more damaging long-term declines brought about by weak demand. “We would need to see more protracted price falls to really start worrying about serious deflationary risks,” Investec’s chief economist Philip Shaw said.

Core inflation – stripping out energy, food and drink – remained lodged at 1 per cent. HSBC economist Liz Martins said: “This is a weak reading for the UK, which increases the uncertainty surrounding the timing of the first rate rise.”