Published: Thu, February 14, 2019
Markets | By Otis Pena

India's January inflation pace drops; RBI could cut rates again

India's January inflation pace drops; RBI could cut rates again

January inflation missed economists' expectations and undershot the central bank's target of 2%.

Before last month, the last time a one-year fixed-rate matched inflation was November 2016, and back then the CPI was only 1.2 per cent.

Head of inflation at ONS Mike Hardie said: "The fall in inflation is due mainly to cheaper gas, electricity and petrol, partly offset by rising ferry ticket prices and air fares falling more slowly than this time previous year".

Last month, 106 accounts matched or beat the CPI but that has more than doubled to 245 after the drop.

The top two year fix from Gatehouse Bank pays 2.35 per cent, now some 0.55 percentage points above inflation.

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Inflation pressures have eased in recent months, following falls in food and crude oil prices. The inflation rate for services like education and health also fell, bringing down the level of core inflation, after excluding volatile items like food and fuel.

While the current capped rate for energy prices is effective until the end of March, it was announced earlier this month that it would rise by 10%, drawing criticism of the price cap for the government.

'That said, sadly it is still the case that many savings accounts are paying less than inflation - particularly older accounts and those held with the high street banks. It softened to 5.4 percent in January, according to economists at Yes Bank Ltd. and Axis Bank Ltd. Pranjul Bhandari, chief India economist at HSBC Holdings Plc, sees it slowing to as low as 4 percent this year. "As a result, we continue to think the Bank of England would press ahead with interest rate hikes if a Brexit deal is reached despite today's slip in inflation below target", says Andrew Wishart, an economist at Capital Economics.

"But with inflation fairly well behaved, the Bank will also have the ability to support the economy by cutting interest rates if there were a no deal Brexit", he added. A double-digit devaluation of Pound Sterling that increased the cost of imported goods for consumers, and a strong labour market were seen behind the pick up.

If the Withdrawal Agreement is not ratified before March 29 then the United Kingdom will automatically leave the European Union and default to doing business with it on World Trade Organization (WTO) terms, which analysts say would be bad for the economy.

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