Home Finance Interest rate cut hopes pushed back after slower-than-expected inflation fall

Interest rate cut hopes pushed back after slower-than-expected inflation fall


Error: Model returned no result. James Smith from ING has suggested that the latest data “all but rules out a rate cut in May, and if we’re right that April’s data proves stickier than the Bank is expecting, then we think that would drastically reduce the chances of a cut in June, too”.

The financial markets, known for their volatility, have taken an even more pessimistic view, predicting that rate cuts will only commence in November.

Prime Minister Rishi Sunak has hailed the figures as evidence “that after a tough couple of years, our economic plan is working”, despite the fact that the decrease in inflation is largely attributed to interest rate hikes by the Bank of England and shifts in global price pressures.

The decline was strongly associated with a deceleration in food price inflation, which has reached its lowest point in over two years.

Grant Fitzner, ONS chief economist, stated: “Inflation eased slightly in March to its lowest annual rate for two-and-a-half years.”

“Once again, food prices were the main reason for the fall, with prices rising by less than we saw a year ago. Similarly to last month, we saw a partial offset from rising fuel prices.”

Inflation for food and non-alcoholic beverages dropped to 4% for the month, down from five percent in February, marking its lowest level since November 2021.

This increased slowdown was partially driven by a drop in meat prices and smaller increases for bread and cereals, according to the ONS.

A decrease in furniture and household goods prices also contributed to the overall fall, with prices in this sector down 0.9 percent in March compared to the same month last year.

In the retail sector, clothing and footwear inflation has decelerated to four percent for the month, down from five percent in February, as women’s clothing stores implemented smaller price increases than typically expected at this time of year.

Motor fuels, however, exerted the most significant upward pressure on prices, with the average petrol price climbing by 2.6p per litre between February and March 2024, reaching 144.8 pence per litre, the ONS reported.

Following the Bank of England’s decision to raise interest rates to a 15-year peak of 5.25%, aiming to dampen demand, inflation has seen an overall decrease.

April’s inflation is anticipated to decline further, bolstered by another reduction in energy costs, bringing the Consumer Price Index (CPI) nearer to the central bank’s goal of two percent.

This trend has fuelled conjecture that the central bank might lower interest rates soon, although Governor Andrew Bailey and his colleagues on the monetary policy committee have indicated it may be premature for such a move.

Deloitte’s chief economist, Ian Stewart, commented: “Inflation is in retreat but the Bank of England cannot yet be sure that it is beaten.”

He added: “Headline inflation is likely to drop below two percent in the coming months, but to be confident it will stay there wage pressures need to ease.”

Stewart also noted: “With earnings growing at close to six percent, and the economy reviving, the Bank will be in no hurry to cut interest rates.”

On Tuesday, the latest data revealed that regular wage growth in the UK, excluding bonuses, hit six percent in the three-month period ending in February. This figure represents a slight dip but remains higher than what economists had forecasted.

The following day, Prime Minister Rishi Sunak confidently addressed the media, stating: “Today’s figures show that after a tough couple of years, our economic plan is working and inflation continues to fall.”

He further highlighted positive trends by adding, “We have also seen energy bills falling, mortgage rates falling and, just this week, data showed people’s wages have been rising faster than inflation for 12 months in a row.”

Sunak conveyed an optimistic outlook with his statement, “My simple message would be: if we stick to the plan, we can ensure that everyone has a brighter future.”

Chancellor Jeremy Hunt echoed this sentiment, saying: “The plan is working: inflation is falling faster than expected, down from over 11 percent to 3.2 percent, the lowest level in nearly two-and-a-half years, helping people’s money go further.”

However, Rachel Reeves, Labour’s shadow chancellor, offered a starkly different perspective: “Conservative ministers will be hitting the airwaves today to tell the British people that they have never had it so good.”

She pointed out ongoing financial pressures by noting, “Prices are still high in the shops, monthly mortgage bills are going up and inflation is still higher than the Bank of England’s target.”

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