Britain’s inflation rate slowed to its lowest level in about three years last month, further cementing the case for the Bank of England to cut interest rates later this year.
Consumer prices rose 2.3 percent in April from a year earlier, down from 3.2 percent in March, the Office for National Statistics said on Wednesday. The rate, which fell slightly less than economists had expected, was the lowest since July 2021 and came close to the Bank of England’s 2 percent target.
Inflation was reduced by lowering the ceiling on household electricity bills set by the state regulator. Food inflation also slowed to 2.9 percent from 4 percent.
The sharp fall in the headline inflation rate, which includes food and energy, signals a new phase in Britain’s policymakers’ fight against inflation. After aggressively raising interest rates after prices surged following pandemic shutdowns and turmoil in energy markets following Russia’s invasion of Ukraine, central bank leaders are trying to determine how much inflationary pressure remains in the economy and how quickly they can cut interest rates.
This is a challenge shared by other major central banks. In the eurozone, officials have signaled that interest rate cuts could happen as early as this summer, while in the United States inflation remains relatively high at 3.4 percent.
In Britain, the central bank expected inflation to fall to 2.1 percent last month. After a few months around the target, inflation is forecast to jump a bit higher and fluctuate around 2.5 percent by the end of 2025 as energy prices, which have stabilized, are no longer dragging down the overall inflation rate. But policymakers are closely watching wage growth and price increases in the service sector, such as restaurants, hotels and concerts, which have traditionally been stubborn components of inflation and remain uncomfortably strong, hovering around 6 percent annual growth.
A slightly higher-than-expected inflation reading could delay a rate cut for several months over the summer, analysts said.
“While today’s significant decline is welcome news, the Bank of England will be disappointed,” wrote Zara Nokes, analyst at JP Morgan Asset Management.
Policymakers will be concerned about volatility in some aspects of inflation, particularly as service prices continued to rise more than expected in April, she added.
Policymakers have indicated that as long as inflation broadly tracks their latest projections, rate cuts are on the way. Two rate-setting board members have already voted in favor of the 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 are betting more on a rate cut then.
The April inflation data comes after another report for the UK economy highlighted recent improvements. On Tuesday, Kristalina Georgieva, managing director of the International Monetary Fund, said the institution “brings some good news for the UK” as it wraps up its annual review of the country’s economy.
After an unexpectedly strong exit from recession at the beginning of this year, the fund raised its forecast for economic growth in Britain this year to 0.7 percent, from 0.5 percent a month ago. It predicts growth of 1.5 percent for 2025, with interest rates falling and wages growing faster than inflation.
The measures taken by the British government and the Bank of England, “combined with the favorable development of energy prices, 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 in which inflation slows without a painful recession.
The fund expected inflation in Britain to “sustainably return” to target by early 2025 and recommended cutting interest rates from 5.25 percent to 4.75 percent or 4.5 percent this year, and by another percentage point next years.
But the long-term outlook for Britain’s economy was gloomier. Weak labor productivity and the number of people out of the labor market due to long-term health problems weigh on the outlook, the fund said.
The fund also warned that British officials are likely to have to make tough decisions to stabilize public debt and balance that with demands for increased public spending and investment. It advises against further tax cuts “as a general principle”, although the ruling Conservative Party has expressed its ambition to cut taxes further ahead of a general election in the next eight months.