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UK inflation dropped less sharply than forecast to 2.3 per cent in April, despite falling energy prices, denting market expectations that the Bank of England will lower interest rates at its next meeting.
The rise in the consumer price index was higher than the 2.1 per cent predicted by the BoE and economists polled by Reuters, while services inflation — which the BoE is watching closely — also overshot expectations.
The headline figure was the lowest since July 2021 and down from March’s rate of 3.2 per cent.
It was hailed by Prime Minister Rishi Sunak as a sign the UK is winning its battle with inflation ahead of the general election expected this year. He said the decline in the headline rate “marks a major moment for the economy, with inflation back to normal”.
However economists said the higher-than-expected reading meant the chances of a rate reduction at the June 20 meeting of the BoE Monetary Policy Committee had diminished. The MPC has argued it needs more evidence that price pressures are receding before it cuts rates from their current 16-year high of 5.25 per cent.
The pound edged 0.3 per cent higher against the dollar to $1.2741 after the Office for National Statistics release.
Yael Selfin, chief economist at KPMG UK, said the headline reading was “within striking distance” of the BoE’s 2 per cent target, but added: “This may still not be enough to convince more cautious MPC members to commit to a rate cut in June, especially while wage growth remains elevated and economic growth momentum is strong.”
Markets lowered the probability of a June quarter point rate cut from 50 per cent to 15 per cent, with a rate reduction by September now only priced at a chance of around 80 per cent.
Investors are now evenly split on whether the BoE will deliver one or two quarter point cuts by the end of the year, having fully priced two cuts before the inflation data was released.
The BoE’s policymakers had predicted a steep fall in inflation due to a reduction in the regulatory cap on household energy bills last month.
Data on the level of services prices will be a key factor, because the BoE sees these as an important gauge of the strength of domestic pricing pressures.
The ONS reported that year-on-year services price growth was 5.9 per cent in April, below the 6 per cent reading for March. However that was well above the 5.5 per cent rate of services price inflation predicted by economists and by the BoE in its latest round of forecasts.
Tomasz Wieladek, economist at T Rowe Price, said the continued strength of services inflation meant the MPC will probably keep rates on hold for now.
“Services CPI inflation is the best gauge of underlying inflation and this remains uncomfortably high,” he said. “The data today clearly show that markets were too optimistic about a June cut and remain too optimistic about BoE cuts this year.”
Core inflation was 3.9 per cent, above a prediction of 3.6 per cent by economists polled by Reuters. That was down from 4.2 per cent the previous month.
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