UK inflation falls to 2.3%, lowest in 3 years

Britain’s inflation rate slowed last month to its lowest level in around three years, further strengthening 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 fell just short of economists’ expectations, was the lowest since July 2021 and came close to the Bank of England’s 2 percent target.

Inflation was reduced by lowering the cap on household energy bills set by a government regulator. Food inflation also slowed to 2.9 percent from 4 percent.

The sharp decline in the headline rate of inflation, which includes food and energy, signals a new phase in Britain’s policymakers’ battle against inflation. After aggressively raising interest rates as prices surged following a pandemic lockdown and turmoil in energy markets following Russia’s invasion of Ukraine, central bankers are trying to determine how much inflationary pressure remains in the economy and how soon they can cut interest rates.

This is a challenge shared by other major central banks. In the euro zone, officials have signaled that interest rate cuts could come as early as this summer, while inflation in the United States remains relatively high at 3.4 percent.

In Britain, the central bank expected inflation to fall to 2.1 percent last month. He predicts that after a few months around the target, inflation will jump slightly higher and hover around 2.5 percent until the end of 2025 as energy prices, which have stabilized, are no longer reducing the overall rate of inflation. But policymakers are closely watching wage growth and price increases in the service sector, such as restaurants, hotels and concerts, which have traditionally been stubborn components of inflation and remain uncomfortably strong, hovering around 6 percent annual growth.

A slightly stronger-than-expected inflation reading could delay a rate cut by several months in the summer, analysts said.

“While today’s significant decline is welcome news, the Bank of England will be disappointed,” Zara Noakes, an analyst at JP Morgan Asset Management, wrote in a note.

Policymakers will have concerns about the volatility of some aspects of inflation, particularly as service prices continued to rise more than expected in April, she added.

Policymakers indicated that while inflation was broadly in line with their latest forecasts, rate cuts were on the 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 Noakes said. The next meeting is in August, and then traders are betting more heavily on a rate cut.

The April inflation data comes after another report on the British economy highlighted recent improvements. On Tuesday, Kristalina Georgieva, the managing director of the International Monetary Fund, said the institution was “delivering some good news for the UK” as it wrapped up its annual review of the country’s economy.

After an unexpectedly strong exit from recession earlier this year, the fund raised its forecast for Britain’s economic growth this year to 0.7 percent from 0.5 percent a month ago. For 2025, he forecasts growth of 1.5 percent, with interest rates falling and wages rising faster than inflation.

The actions taken by the British government and the Bank of England, “combined with favorable developments in energy prices, are paying off,” Ms Georgieva said in London. “The economy is growing, inflation is falling and a soft landing is looming,” she said, referring to a situation where inflation slows without a painful recession.

The fund expects UK inflation to make a “sustainable return” to target by early 2025 and has recommended cutting interest rates from 5.25% to 4.75% or 4.5% this year and by another percentage point next year .

But the longer-term outlook for Britain’s economy was bleaker. Weak labor productivity and the number of people out of the labor market due to long-term health problems weigh on the outlook, the fund said.

The fund also warned that British officials are likely to have to make tough choices to stabilize public debt and balance that against demands to increase public spending and investment. He recommended more tax cuts “as a general principle”, although the ruling Conservative Party has stated its ambition to cut taxes further ahead of a general election in the next eight months.

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