NEW YORK (TheStreet) -- The U.K.’s inflation rate has turned negative for the first time since the 1960s, and Simon Smith, chief economist at FXPro, says that means the Bank of England will refrain from raising interest rates into 2016.
The U.K. government announced Tuesday that headline inflation fell 0.1% in April from a year before. Meanwhile, so-called core inflation, which excludes prices of more volatile items such as food and energy, fell to 0.8%.
"Bottom line, it’s certainly keeping rates on hold for the rest of the year and into early next year as well," Smith says, referring to U.K. interest rates.
Smith says it's important to look at the core inflation rate, which had been holding up.
"Even two months ago, the core rate was at 1.4%," he says. "That's fallen dramatically, so [it’s] now at 0.8%. it was at 1.0% the previous month. And that was the lynchpin of which Bank of England was saying, 'Look, you know, we’re seeing low headline inflation, but don't worry. Core inflation is still relatively firm, so there’s nothing to worry about.' And that story has changed.”
Smith says it's possible that some of downward price pressure in Tuesday's report might be unwound in May.
"A lot of it is around … air and transport fares that around the Easter period are quite volatile," he says. "I've noticed that before. So when we do see such falls in year-on-year terms we can see them reversed in the following month."