Friday 17 August 2018

UK rate rise less likely after surprise inflation fall

The unexpected drop in inflation should boost real-term wage growth for UK workers (file photo: PA)
The unexpected drop in inflation should boost real-term wage growth for UK workers (file photo: PA)

Andy Bruce and Sarah Young

Inflation in the United Kingdom unexpectedly cooled to a one-year low in March, according to figures that raise some doubts over bets the Bank of England will raise interest rates in May.

Sterling tumbled below $1.42 and British government bond prices shot, easing up after official data yesterday showed annual consumer price inflation fell to 2.5pc from 2.7pc in February.

The figure was well below economists' average expectation in a Reuters poll for it to hold at 2.7pc.

But the fall in inflation means it is highly likely that wage growth in real terms has by now returned for UK workers.

While good news for consumers who have been squeezed since the 2016 Brexit vote hammered the value of the pound and pushed up the cost of imports, the fall in inflation suggests price pressures may not be as strong as the central bank had thought.

For the first quarter as a whole, annual inflation averaged 2.7pc - somewhat below the forecast of 2.92pc that the BoE made in February.

A firm majority of economists polled by Reuters in the run-up to the data predicted that the Bank would raise interest rates by 0.25 percentage points to 0.75pc at its May policy meeting. "We believe (the fall in inflation) will be good news for growth as household real incomes growth accelerates and boosts spending," Scotiabank economist Alan Clarke said.

"The flipside is that the market is likely to question the likelihood of BoE rate hikes, both near term and later in the year."

Short sterling futures - which reflect expectations for British interest rates - rose sharply after the data, implying a reduced chance of higher interest rates in the months ahead.

Nonetheless, interest rate swaps still price in a roughly two-in-three chance that BoE rates will rise to 0.75pc next month.

Two-year gilt yields dropped more than 8 basis points to a one-month low of 0.808pc.

Inflation jumped in Britain as sterling plunged after June 2016's vote to leave the European Union.

But inflation appears to have peaked in November, when CPI hit 3.1pc, the highest reading in more than five years.

Sterling has recovered some of its value in recent months and had reached a post-Brexit referendum high of $1.4377 on Tuesday.

That should help to ease some of the inflation pressure which has hurt the spending power of many households. (Reuters)

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