UK inflation falls to record low

The Bank of England has kept interest rates the same since November

LONDON, England -- Britain's inflation rate tumbled in June to its lowest level since records began 27 year ago, ruling out any chance of an interest rate rise in coming months.

Retail prices -- which excludes volatile mortgages payments -- rose 1.5 percent last month from a year earlier compared to a 1.8 percent annual increase in May, the Office of National Statistics said on Tuesday.

Economists polled by Reuters had forecast a 0.2 percentage point rise in inflation and an annual rate of 1.7 percent.

The weaker-than-expected June rate -- the lowest since 1975 -- was due to a decline in the cost of motoring, seasonal food and clothing.

"You can all but rule out a rate move in August," George Buckley, economist at Deutsche Bank, told Reuters.

Had June's inflation rate fallen below 1.5 percent, Bank of England Governor Sir Edward George would have had to write a letter to the Chancellor of the Exchequer Gordon Brown explaining why and what the bank would do about it.

The government has mandated the BoE to set interest rates at levels which will keep inflation within 1 percent of the bank's 2.5 percent target.

"I think Eddie George is quite lucky that it did not go below 1.5 percent and force him to write a letter to the chancellor," Buckley said.

"But we think this is a low point and we see RPIX (retail prices excluding mortgage repayments) rising to about 2 percent over the next few months. We think the RPIX will be higher for July than June."

The BoE left interest rates unchanged at 4 percent -- the lowest in 37 years -- in July as financial markets slumped, raising concerns that a global economic recovery will be sluggish.

It last adjusted rates in November after cutting borrowing costs seven times in 2001 in an effort to reverse the global economic slowdown.

George warned earlier this month that strong consumer spending, which is being fed in large part by the "feel good factor'' of surging house prices, must slow down soon or interest rates will have to rise.

However, many economists now believe rates could stay on hold for the rest of the year if signs of economic recovery do not improve -- especially in the manufacturing industry which has lagged other sectors.

"In these uncertain times, today's weak inflation will probably reinforce many members of the [BoE] Monetary Policy Committee's view that they have time to wait and see," John Butler, an economist at HSBC, told Reuters.