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The Bank of England is expecting “quite a drop” in inflation to levels around its 2 per cent target when official numbers are released on Wednesday, its governor said, as he predicted the next move in official interest rates by the central bank would be a cut.
Andrew Bailey said falling energy costs should help bring down the rate of consumer price inflation when the Office for National Statistics publishes its April reading.
He added the BoE’s staff had in their latest outlook reduced their take on how persistent inflation is likely to be in the future.
The BoE and economists polled by Reuters expect the headline rate of CPI inflation to drop to 2.1 per cent in April, from 3.2 per cent in March.
The numbers will be a crucial input for the BoE’s Monetary Policy Committee when its members next meet in June.
Some economists expect the MPC to cut rates from the current level of 5.25 per cent in June.
The April CPI reading will also be important politically, as chancellor Jeremy Hunt claims the UK economy is turning a corner after the cost of living crisis.
He is due to hail the anticipated fall in price growth to close to the BoE’s 2 per cent target as a sign inflation is returning “to normal”, according to allies.
They argue before the jump in prices it was commonplace for inflation to hover either just above or just below the 2 per cent target.
For Hunt, this return to “normality” will be presented as a sign of success for his economic policies.
Bailey was speaking after a lecture at the London School of Economics on how the BoE will handle the unwinding of its vast balance sheet.
He said he did not yet know what the April CPI reading would be, but added, “I do expect quite a drop in the number”, in part because of movements in the regulatory cap on household energy prices.
“Whether that will leave headline inflation at or just above target I don’t know — we will see, but it will be much nearer to target than before,” said Bailey.
He noted the BoE’s staff in their latest forecasting round had increased their estimate of the share of the inflationary upsurge driven by high import costs — which are now fading.
In addition, Bailey said the BoE had reduced its view on how persistent inflation would be, and this was important when thinking about the timing of rate cuts. “I think the next move will be a cut,” he added.
His comments will fuel speculation the BoE could be ready to lower rates as soon as June, although the upcoming readings on inflation and the strength of the labour market will be important.
Bailey was asked about recommendations by the IMF in its latest Article IV health-check on the UK economy, among which was a suggestion that the BoE hold a press conference after every MPC meeting, rather than just when it releases its full set of economic forecasts.
Bailey acknowledged the US Federal Reserve and European Central Bank hold more regular press conferences on their monetary policy decisions than the BoE. He said the BoE would consider the idea as part of its review of recommendations from former Fed chair Ben Bernanke in his recent report on the BoE’s forecasting.
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