Britain’s inflation rate slowed to its lowest level in about three years last month, further strengthening the case for the Bank of England to cut interest rates later this year.
Consumer prices rose 2.3 percent year-on-year in April, compared with 3.2 percent in March, the Office for National Statistics said on Wednesday. The interest rate, which fell slightly less than economists expected, was the lowest since July 2021 and neared the Bank of England’s 2 percent target.
Inflation was brought down by a reduction in the cap on household energy bills set by a government 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 British politicians’ battle against inflation. After aggressively raising interest rates after prices soared amid pandemic lockdowns and the turmoil in energy markets following Russia’s invasion of Ukraine, central bankers are trying to figure out how much inflationary pressure remains in the economy and how quickly they can lower interest rates.
It is a challenge that other major central banks also share. In the euro zone, officials have signaled that interest rate cuts could come as early as the summer, while in the United States inflation remains relatively high at 3.4 percent.
In Great Britain, the central bank had expected inflation to fall to 2.1 percent last month. It predicted that inflation would rise slightly higher after a few months around its target, hovering around 2.5 percent by the end of 2025, as energy prices, which have stabilized, no longer drag down the overall inflation rate. But policymakers are watching wage growth and price increases in the service sector, such as restaurants, hotels and concerts, which are traditionally stubborn drivers of inflation and remain uncomfortably strong at about 6 percent annual growth.
Slightly stronger-than-expected inflation readings could delay a rate cut over the summer by a few months, analysts said.
“While today’s sharp decline is welcome news, the Bank of England will be disappointed,” Zara Nokes, an analyst at JP Morgan Asset Management, wrote in a note.
Policymakers would be concerned about the persistence of certain aspects of inflation, particularly as services prices continued to rise more than expected in April, she added.
Policymakers have indicated that rate cuts are imminent as long as inflation broadly matches their recent forecasts. Two members of the collective bargaining committee have already voted for reductions.
A rate cut at the Bank of England’s next policy meeting in June would be premature, Ms Nokes said. The next meeting will be in August and traders will then bet more heavily on a rate cut.
April’s inflation data follows another report on the UK economy that highlighted recent improvements. On Tuesday, Kristalina Georgieva, the managing director of the International Monetary Fund, said the institution “brings some good news for the United Kingdom” as it concluded its annual review of the country’s economy.
After a stronger-than-expected exit from a recession earlier this year, the fund raised its forecast for British economic growth this year to 0.7 percent from 0.5 percent a month ago. He forecast growth of 1.5 percent for 2025, with interest rates falling and wages rising faster than inflation.
The measures taken by the British government and the Bank of England “coupled with favorable energy price developments 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 triggering a painful recession.
The fund expected U.K. inflation to return to target “on a sustained basis” by early 2025 and recommended raising interest rates from 5.25 percent to 4.75 percent or 4.5 percent this year and next year to reduce it by another percentage point.
But the longer-term outlook for the UK economy was bleaker. Weak labor productivity and the number of people excluded from the labor market due to long-term health problems are weighing on the outlook, the fund said.
The fund also warned that British officials are likely to have to make difficult decisions to stabilize public debt and balance it with demands for higher government spending and investment. She advised against further tax cuts “in principle” even though the ruling Conservative Party has stated its aim to cut taxes further in the run-up to the general election in the next eight months.