British inflation slowed to the lowest level in around three years last month, further strengthening the case for the Bank of England to cut rates later this year.
Consumer prices rose 2.3 percent in April from a year earlier, up from 3.2 percent in March, the Office for National Statistics said on Wednesday. Interest rates, which fell slightly less than economists expected, were the lowest since July 2021 and close to the Bank of England’s 2 percent target.
Inflation was brought down by a reduction in the limit on household energy bills set by a government regulator. Food inflation also fell from 4 to 2.9 percent.
The sharp fall in headline inflation, which includes the food and energy sectors, heralds a new phase in British policymakers’ battle against inflation. After aggressively raising interest rates after prices soared due to pandemic lockdowns and the turmoil in energy markets following Russia’s invasion of Ukraine, central bankers are trying to determine how much inflationary pressure remains in the economy and how quickly they can lower the interest rate.
It’s a challenge shared by other major central banks. In the euro zone, officials have indicated that interest rate cuts could happen as soon as this summer, while in the United States inflation remains relatively high at 3.4 percent.
In Great Britain, the central bank expected inflation to fall to 2.1 percent this month. It predicts that after a few months around its target, inflation will rebound slightly higher and hover around 2.5 percent until the end of 2025, as energy prices, which have stabilized, will no longer lower overall inflation. But policymakers are keeping a close eye on wage growth. and price increases in services such as restaurants, hotels and concerts, which are traditionally persistent components of inflation and remain uncomfortably strong, with annual growth of around 6 percent.
The slightly stronger-than-expected inflation could delay a rate cut over the summer by a few months, analysts said.
“While today’s meaningful decline is welcome news, the Bank of England will be disappointed,” Zara Nokes, analyst at JP Morgan Asset Management, wrote in a note.
Policymakers will be concerned about the persistence of some aspects of inflation, especially as prices for services continued to rise more than expected in April, she added.
Policymakers have indicated that as long as inflation broadly follows their latest projections, rate cuts are on the way. Two members of the rate-setting committee have already voted in favor of cuts.
A rate cut at the Bank of England’s next policy meeting in June would be premature, Ms Nokes said. The next meeting is in August and traders will then bet more heavily on a rate cut.
The April inflation data follows another report on the UK economy highlighting recent improvements. On Tuesday, Kristalina Georgieva, managing director of the International Monetary Fund, said the institution brought “a little bit of good news for Britain” as it concluded its annual review of the country’s economy.
After an unexpectedly strong exit from the recession early this year, the fund raised its forecast for British economic growth this year to 0.7 percent, up from 0.5 percent a month ago. Growth of 1.5 percent is forecast for 2025, with interest rates falling and wages rising faster than inflation.
The measures taken by the British government and the Bank of England, “combined with favorable energy price developments, are paying off,” Ms. 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 slows without a painful recession.
The fund expected inflation in Britain to deliver “sustainable returns” by early 2025 and recommended cutting interest rates from 5.25 percent to 4.75 percent or 4.5 percent this year, and by a further 1 percent next year percentage point.
But the longer-term outlook for the British economy was bleaker. Weak labor productivity and the number of people leaving the labor market due to long-term health problems weigh on the prospects, the fund said.
The fund also warned that British officials are likely to have to make difficult choices to stabilize government debt, balancing that with demands for higher government spending and investment. It recommended against further tax cuts “as a general principle”, even as the ruling Conservative Party has expressed its ambition to further cut taxes ahead of a general election in the next eight months.