The Bank of England is more likely to delay cutting interest rates later in the year if inflation falls slower than expected. This is due, in part, to the higher fuel prices.
According to the Office for National Statistics, the pace of growth in consumer prices in the UK fell from 3.4% to 3.2 percent in March, which is the lowest rate in over two years. The Bank of England and City analysts had anticipated a larger drop.
The headline Consumer Price Index was higher than expected in March due to the price increases in the sectors of transport and communication. Inflation in food and energy, which are the main causes of the crisis, slowed down further in March. According to the ONS, price growth in the hotel and restaurant sector remained high.
Jeremy Hunt stated: “The plan works: the inflation rate is dropping faster than expected. It has dropped from more than 11 percent to 3.2 percent, which is the lowest level for nearly two-and-a-half years. This helps people’s money last longer.”
Grant Fitzner said that the ONS chief economist, Grant Fitzner: “Once more, food prices are the main cause of the decline, with prices increasing by less than they did a year earlier.”
Fitzner said that the drop in inflation was due to high fuel prices, which were probably a result of tensions occurring in the Middle East.
The Bank of England had predicted a slower rate of inflation decline, but the actual result was much higher. This led to speculation that rates would remain high for longer.
The financial markets believe that the only rate reduction this year, of 0.25 percentage points, will occur at the meeting of the monetary policy committee in November. Investors thought that the Bank of England was going to lower rates six or seven more times in 2024.
The MPC closely monitors the services inflation rate to help them make interest rate decisions. It dropped from 6.1% in February to 6%. The Bank had expected it to drop to 5.8 percent.
Core inflation (which excludes volatile energy and food prices) fell from 4.5 to 4.2 percent. The ONS reported that food prices increased by 4 percent annually. This is down from the peak of around 20 percent last year.
Inflation in the UK has been the highest among G7 nations over the past two years. Inflation in the Eurozone fell to 2.4% in March while it rose to 3.5% in the United States. In its latest global economic forecasts the International Monetary Fund said that UK inflation will gradually decline this year due to lower food and energy prices.
Analysts believe that the reduction of the energy price cap will also cause the inflation to return to the official target of 2 percent in the spring.
Ruth Gregory, a consultant and deputy chief UK economist, at Capital Economics said that “utility prices are set to drop by 12.3% [month-on-month] in April. Inflation will still fall just below the 2% target in this month.”
The Bank could still be comfortable reducing interest rates in June if inflation falls as fast as expected in the next few months.
A near-10% increase in the minimum salary and an increase for a variety of household bills linked to inflation could strengthen price pressures. A escalation in the Middle East conflict has also increased the risk of an increase in international energy prices.
Andrew Bailey, Bank Governor, said this week that the Bank has “strong evidence” of UK inflation declining. He added that “the dynamics of inflation are quite different between Europe… and the US.”
The Bank’s comment suggests that it is willing to relax monetary policy in order to compete with the US Federal Reserve. It appears likely that the Fed will continue to maintain restrictive rates for a longer period of time to combat stubborn inflation.
Restrictive monetary policy has slowed economic growth, and contributed to a rise in unemployment. The International Monetary Fund has lowered its estimate of UK economic growth this year to just 0.5 percent and expects the Bank of England to cut rates three times.