Does falling inflation support or undermine case for rate hike?

On the face of it, the fall-back in inflation in March has reduced the chances of a hike in interest rates in May. And Governor Carney’s comments appear to add weight to this view. However, an argument could be made that falling inflation might actually support the case for raising interest rates. After all, the biggest drag on the economy recently has been slower consumer spending growth, a reflection of the squeeze on households’ real earnings. So the fact that real wages are now probably rising again, should help to support economic growth and make further interest rate increases more palatable for households. Granted, a May rate hike now looks like a close call. Regardless, we still think that interest rates are likely to rise faster than markets expect over the coming years.