Britain’s inflation rate slowed last month to its lowest level in about three years, further cementing the case for the Bank of England to cut interest rates later this year.
Consumer prices rose 2.3 percent in April from a year earlier, down from 3.2 percent in March, the Office for National Statistics said on Wednesday. The rate, which declined slightly less than economists expected, was the lowest since July 2021 and approached the Bank of England’s 2 percent target.
Inflation was pulled down by a decrease in the cap on household energy bills set by a government regulator. Food inflation also slowed to 2.9 percent, from 4 percent.
The steep decline in the headline inflation rate, which includes food and energy, signals a new phase in British policymakers’ battle against inflation. Having aggressively raised interest rates after prices soared following pandemic lockdowns and the turmoil in energy markets after Russia’s invasion of Ukraine, central bankers are trying to determine how much inflationary pressure is left in the economy and how soon they can cut interest rates.
It’s a challenge shared by other major central banks. In the eurozone, officials have signaled rates cuts could come as soon as this summer, whereas in the United States, inflation remains relatively hot at 3.4 percent.
In Britain, the central bank expected inflation to fall to 2.1 percent last month. It forecast that, after a few months around its target, inflation would bounce a little higher and fluctuate around 2.5 percent until late 2025 as energy prices, which have stabilized, no longer pull down the overall inflation rate. But policymakers are scrutinizing wage growth and price increases in the services sector, such as restaurants, hotels and concerts, which are traditionally stubborn components of inflation and remain uncomfortably strong, hovering around 6 percent annual growth.
The slightly stronger-than-expected inflation reading could delay a rate cut by a few months over the summer, analysts said.
“While today’s meaningful decline is welcome news, the Bank of England will be disappointed,” Zara Nokes, an analyst at J.P. Morgan Asset Management, wrote in a note.
Policymakers will have concerns about the stickiness of some aspects of inflation, particularly because prices for services continued to grow more than expected in April, she added.
Policymakers have indicated that as long as inflation broadly follows their latest projections, rate cuts are on their way. Two members of the rate-setting committee have already voted for cuts.
A rate cut at the Bank of England’s next policy meeting in June would be premature, Ms. Nokes said. The following meeting is in August, and traders are betting more heavily on a rate cut then.
The April inflation data comes on the heels of another report for Britain’s economy that highlighted recent improvements. On Tuesday, Kristalina Georgieva, the managing director of the International Monetary Fund, said the institution was “delivering a little bit of good news for the U.K.” as it ended its annual review of the country’s economy.
After an unexpectedly strong exit from a recession at the start of this year, the fund raised ts forecast for Britain’s economic growth this year to 0.7 percent, from 0.5 percent a month ago. For 2025, it forecast 1.5 percent growth, with interest rates falling and wages growing faster than inflation.
Actions taken by the British government and the Bank of England, “combined with favorable energy price developments, are paying off,” Ms. Georgieva said in London. “The economy is growing, inflation is falling and soft landing is in sight,” she said, referring to a situation in which inflation slows without a painful recession.
The fund expected inflation in Britain to make a “durable return” to target by early 2025 and recommended cutting interest rates from 5.25 percent to 4.75 percent or 4.5 percent this year, and by another one percentage point next year.
But the longer-term prospects for Britain’s economy were gloomier. Weak labor productivity and the number of people who are out of the job market because of long-term health problems are weighing on the outlook, the fund said.
The fund also warned that British officials will probably need to make difficult choices to stabilize public debt, and balance that against the demands on increased public spending and investment. It advised against more tax cuts “as a general principle” even as the governing Conservative Party has stated its ambition to further reduce taxes ahead of a general election within the next eight months.
Content Source: www.nytimes.com