Britain’s rate of inflation slowed to its lowest level in three years last month, further strengthening the argument that the Bank of England will cut interest rates later this year.
Consumer prices rose 2.3 percent in April from a year earlier, up from 3.2 percent in March, the National Statistics Office said on Wednesday. The rate, which fell slightly less than economists had expected, was the lowest since July 2021 and came close to the Bank of England’s two percent target.
Inflation was pulled down by a reduction in the ceiling on household energy bills set by the government regulator. Food inflation also slowed to 2.9 percent from 4 percent.
The sharp drop in headline inflation, which includes food and energy, signals a new phase in Britain’s policymakers’ fight against inflation. Central bankers aggressively raised interest rates after prices surged following pandemic blockades and shocks in energy markets following Russia’s invasion of Ukraine, central bankers are trying to figure out how much inflationary pressure remains in the economy and how soon they can cut interest rates.
It’s a challenge shared by other major central banks. In the euro zone, officials have hinted that a rate cut could come as early as this summer, while in the United States inflation remains relatively high at 3.4 percent.
In Britain, the central bank expected inflation to fall to 2.1 percent last month. It predicts that after a few months around its target, inflation will rebound slightly higher to around 2.5 percent by the end of 2025 as energy prices, which have stabilized, are no longer pulling down the headline inflation rate. But policymakers are scrutinizing wage growth and price increases in the service sector, such as restaurants, hotels and concerts, which are traditionally stubborn components of inflation and remain uncomfortably strong, hovering around 6% annual growth.
Slightly stronger-than-expected inflation could delay a rate cut by several months in the summer, analysts said.
“While today’s significant drop is welcome news, the Bank of England will be disappointed,” Zara Nokes, an analyst at JP Morgan Asset Management, wrote in a note.
Policymakers will be concerned about the stickiness of some aspects of inflation, particularly as service prices continued to rise more than expected in April, she added.
Policymakers have indicated that as long as inflation generally follows their latest projections, a rate cut is on the way. Two members of the rate-setting committee have already voted in favor of the reduction.
A rate cut at the Bank of England’s next meeting in June would be premature, Nokes said. The next meeting is in August, and traders are betting more on a rate cut then.
The April inflation data comes on the heels of another report on the UK economy which highlighted recent improvements. On Tuesday, Kristalina Georgieva, managing director of the International Monetary Fund, said the institution was “bringing some good news for the UK” as it concluded its annual assessment of the country’s economy.
After an unexpectedly strong exit from recession earlier this year, the fund raised its forecast for growth in the UK economy this year to 0.7 percent from 0.5 percent a month ago. For 2025, it predicts 1.5 percent growth, interest rates will fall and wages will rise faster than inflation.
The measures taken by the British government and the Bank of England are “paying off in connection with the favorable development of energy prices,” Georgieva said in London. “The economy is growing, inflation is falling and a soft landing is in sight,” she said, referring to a situation where inflation is slowing without a painful recession.
The fund expected Britain’s inflation to reach a “sustainable yield” by early 2025 and recommended cutting interest rates from 5.25 percent to 4.75 percent or 4.5 percent this year and another one percentage point next year.
However, the longer-term outlook for the UK economy was gloomier. Weak labor productivity and the number of people out of the labor market due to long-term health problems weigh on the outlook, the fund said.
The fund also warned that British leaders were likely to have to make difficult decisions to stabilize public debt and balance this with demands for increased public spending and investment. It did not recommend further tax cuts “as a general principle”, although the ruling Conservative Party said it was ambitious to cut taxes further ahead of a general election in the next eight months.