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Economists Forecast May UK Interest Rate Rise

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Image: Headquarters of the Bank of England.

Economists expect the Bank of England to raise interest rates in May despite inflation falling to the lowest rate in a year in March.

Consumer price inflation fell to 2.5%

The Bank is forecast to raise the interest rate from 0.5% to 0.75% next month when its Monetary Policy Committee meets — even though UK consumer price inflation fell to 2.5% last month, according to the Office for National Statistics.

It fell from 2.7% in February after prices for women’s clothes rose at a slower pace than the year before. The ONS said the biggest contribution to waning inflation was a slower rise in clothing and footwear. Prices rose by 0.7% between February and March 2018, slower than the 2% for the same period last year.

Alcohol and tobacco prices also contributed to easing inflationary pressure. Mike Hardie, the ONS’ head of inflation, said the new autumn Budget means tobacco duty rises no longer appear in March.

Pound fell 0.74% Against Dollar on News

The inflation figure has put a spanner in the works for the Bank of England because the fall in inflation throughout March means it could fall further, to below the Bank’s 2% target, earlier than expected. The pound fell by 0.74% against the dollar to $1.4183 on the news.

Economists had expected inflation to stay at the annual 2.7% rate in February. But inflation has fallen from a high of 3.1% in November — beyond the Bank of England’s target range: one percentage point deviation either side of two percent — because of the devaluation of the pound following the Brexit vote, leading retailers to raise prices.

The ONS data suggest the squeeze on UK household income may be coming to an end as wages rise alongside the fall in inflation. The ONS said this week that real pay in the year to February rose, as wages both including and excluding bonuses rose by 2.8%.

That may give the Bank of England more breathing space to tighten monetary policy, although the prospect of higher interest itself rates may put pressure on consumer spending.

Economists had previously believed the Bank is highly likely to raise interest rates in May. And even though the inflation reading could give some MPC members reason to change their minds, economists said they believe the Bank will go ahead with the May rate rise.

Laith Khalaf, senior analyst at Hargreaves Lansdown, told the BBC: “Wage growth remains surprisingly lackluster in the face of such low levels of unemployment, though it is now heading in the right direction, and the recent political shift on public sector pay suggests there’s some more momentum in the post.

“While an interest rate rise now looks odds on in May, the Bank will still be wary of moving too fast and too soon, so beyond that monetary policy is still likely to move at a slovenly pace.”

Note: The opinions expressed in this article are the author's own and do not necessarily reflect the view of Alvexo on the matter.