UK inflation unexpectedly cools to one-year low of 2.5%

Shift raises doubts over whether Bank of England will raise interest rates in May


British inflation unexpectedly cooled to a one-year low in March, according to figures that raise some doubts over bets the Bank of England will raise interest rates in May.

Sterling tumbled against the dollar and British government bond prices shot up after official data on Wednesday showed annual consumer price inflation fell to 2.5 per cent from 2.7 per cent in February.

The figure was well below economists’ average expectation for it to hold at 2.7 percent. While good news for consumers who have been squeezed since the 2016 Brexit vote hammered the value of the pound and pushed up the cost of imports, the fall in inflation suggests price pressures may not be as strong as the central bank had thought.

For the first quarter as a whole, annual inflation averaged 2.7 per cent - somewhat below the forecast of 2.92 per cent that the BoE made in February. A firm majority of economists polled by Reuters in the run-up to the data predicted that the Bank would raise interest rates by 0.25 percentage points to 0.75 percent at its May policy meeting.

“We believe (the fall in inflation) will be good news for growth as household real incomes growth accelerates and boosts spending,” Scotiabank economist Alan Clarke said.

“The flipside is that the market is likely to question the likelihood of BoE rate hikes, both near term and later in the year.” - PA