UK inflation drops more than expected to slowest in a year

By BLOOMBERG

LONDON • UK inflation slowed to the weakest in a year in March, raising questions about how quickly the Bank of England (BoE) will increase interest rates.

Consumer prices rose 2.5% from a year earlier, down from 2.7% in February, the Office for National Statistics (ONS) said yesterday. That’s less than economists estimated and below the BoE’s most recent forecast of 2.8% for the same period. Core inflation cooled to 2.3%, also the lowest rate in a year.

The figures may weaken the case for more interest-rate increases later this year. Policymakers are widely expected to raise the benchmark for a second time in six months at their May meeting as inflation continues to exceed the 2% target.

Officials have also said they’ll likely need to raise borrowing costs several times over the coming years as domestically generated inflation pressures pick up.

The pound tumbled after the data, sliding 0.7% to US$1.4182 (RM5.67) as of 10:19am London time yesterday.

While a hike next month is still almost fully priced in by markets, traders now see about a 40% chance of a follow up in November, down from more than 50% at the start of this week.

“The market is likely to question the likelihood of BoE rate hikes, both near-term and later in the year,” said Alan Clarke, an economist at Scotiabank.

“Even if the Monetary Policy Committee (MPC) does look through the low reading on this occasion and hike rates in May, this dilemma is likely to continue over the remainder of the year.”

For hawks at the BoE, labour-market data published on Tuesday provided ammunition, with the jobless rate falling to its lowest since 1975 and wages rising at their fastest pace in almost three years.

“An inflation undershoot would clearly give the central bank food for thought. But to throw the MPC off its current trajectory, it would have to be seen as persisting over its policy horizon. With tightness in the labour market showing no signs of letting up, that remains unlikely and leaves us cont inuing to expect another rate hike in November,” according to Dan Hanson and Jamie Murray, Bloomberg Economics.

Downward momentum on inflation came for women’s clothing, which rose at a slower pace than usual for this time of year, the ONS said. Alcohol and tobacco taxes also didn’t increase as usual after the government changed the timing of its annual budget announcement to the autumn.

Producer prices eased to the lowest rate since 2016, mainly due to smaller increases in food prices, the report said.

Input prices gained 4.2% from a year earlier in March, driven by higher crude oil costs.

The ONS’ house-price gauge showed an annual gain of 4.4% in February, down from 4.7% in January. Prices in London fell for the first time since 2009.