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Inflation, interest rates and oil prices – a round-up

The period leading up to Christmas and the New Year is usually a quiet time for economic news – but right now, the opposite is true. Fresh falls in the price of oil and the prospect of a first increase in US interest rates in almost a decade are proving to be major focal points this week. But slowing demand around the world and especially in China continues to give cause for concern.

Oil prices hit seven-year low

The news that the price of crude oil hit a seven-year low earlier this week should offer some short-term benefit at least for consumers in the UK: the cost of petrol and diesel is already falling and householders can expect to see gas and electricity bills shrink too. Lower global demand for oil and a failure by oil-producing countries to agree to limit supply are behind this latest price drop.

Cheaper crude means that inflation in the UK is unlikely to rise significantly, if at all, over the coming months. In both September and October, the consumer prices index (CPI) was recorded at -0.1% and while November’s figure may move out of negative territory, it could well dip back again when new data is released in 2016.

A Bank of England rate rise looks more distant that ever

All this means that the prospect of the Bank of England raising interest rates looks ever more distant. Back in the summer, the Bank’s governor, Mark Carney, suggested the first rise since 2007 might be taking place around now. Since then, however, disappointing economic news from the UK as well as overseas has kept the pressure on the Bank to maintain the base rate at its current 0.5% level.

Public expectation of a rate rise has likewise fallen: back in August, 50% of people thought the base rate would increase within 12 months, but this proportion has fallen to just over a third today, according to Bank of England research.

Will the Fed raise rates this week?

The picture across the Atlantic is somewhat different, however. Analysts widely expect the Federal Reserve – the US central bank – to raise rates for the first time since 2006 later this week. Such a move might make a UK rise fractionally more likely – but the fact is that growth in the US economy, in particular in wages, looks to be stronger than over here.

Speaking on Monday, the Bank’s deputy governor Minouche Shafik said she would be reluctant to vote for a rate hike until she was sure earnings growth was back on track in Britain. In a similar vein, the CEO of Royal Bank of Scotland Ross McEwan has said this week that he doesn’t expect a rate rise until 2017 at the earliest.

A volatile end to 2015

With economic uncertainty causing more volatility on the stock market – the FTSE-100 has just fallen below 6,000 points for the first time since September – and no sign of higher returns on savings, the two traditional homes for spare cash don’t look too appealing right now.

It is hardly surprising, then, that more and more people are turning to alternative forms of long-term investing, such as peer-to-peer lending through Zopa. You can find out more about lending here.

With peer-to-peer lending, your capital is at risk.