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UK inflation could hold around the Bank of England’s 2 per cent target for the next three years, according to an interest rate-setter, making the country “less of an outlier and more of a laggard” in terms of price growth.
Dave Ramsden, BoE deputy governor, said on Friday that “the balance of domestic risks to the outlook for UK inflation” had “tilted to the downside” since the central bank published its latest monetary policy report in February.
This created “a scenario where inflation stays close to the 2 per cent target over the whole forecast period at least as likely” and left the UK “as less of an outlier and more of a laggard in terms of recent inflation performance, and one that is now catching up quickly”, Ramsden told an audience in Washington.
The policymaker’s comments suggest he does not need much more evidence of falling inflation he begins voting for interest rate cuts, even as some MPC members have suggested they are not ready to do the same.
Last month Andrew Bailey, BoE governor, told the Financial Times that cuts to the benchmark rate — which stands at a 16-year high of 5.25 per cent — were “in play” at future MPC meetings. But since the last meeting Megan Greene and Jonathan Haskel, both external members of the MPC, have warned that reductions should be “a way off” because of inflation persistence.
Sterling fell slightly following Ramsden’s speech, trading 0.4 per cent lower against the US dollar at $1.239.
The Monetary Policy Committee’s forecast showed price growth falling to the 2 per target in the second quarter of this year, before returning to roughly 3 per cent by the end of March 2025.
However, Ramsden said that while he had voted with the majority of MPC members to hold rates in March, he had become “more confident in the evidence that risks to persistence in domestic inflation pressures are receding”.
UK inflation declined less than expected to 3.2 per cent in March, according to official data published this week. That is the lowest since 2021 and the first time the rate in Britain has been below that of the US since March 2022.
UK inflation remained higher last month than in the eurozone, however, where it dropped to 2.4 per cent, also the lowest reading since 2021.
Ramsden noted that “similar disinflationary effects to those which started earlier in the US and euro area are now coming through, leading to a pronounced reduction in UK inflation”.
“UK CPI inflation in March was below US CPI inflation and the April data is very likely to show the UK converging in line with Euro area inflation,” he added.
Ramsden said the risk of persistence in domestic inflationary pressures was receding because lower CPI readings were pushing down price growth expectations. This was helping to weaken pay growth, which in turn had started to feed into weaker services inflation, he said.
Services inflation is closely watched by the BoE as a gauge of domestic inflationary pressures. At 6 per cent, it remained much higher in the UK last month than in the US or the eurozone.
Ramsden argued that price growth in the services sector had been determined to a large extent by the energy price shock sparked by the Ukraine war. The unwinding of the shock meant “we should place more weight on the likelihood that a greater part of recent services inflation will dissipate more quickly and so lead to less persistence”, he added.
Ramsden also noted that while recent GDP figures suggested the UK had exited the technical recession that it entered last year, output remained below early 2022 levels.
“A more material distinction is that the disinflation process in the US is taking place against the backdrop of a stronger economy, particularly on the demand side, and is already proving to be less smooth,” he said.
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