Another drop in UK inflation dims prospect of rate hike soon

LONDON (AP) — Inflation in Britain eased closer to the Bank of England’s target during April, a surprise decline that prompted a sharp fall in the pound as traders reined in expectations of another interest rate hike this year.

The Office for National Statistics said Wednesday that consumer prices were up 2.4 percent in the year to April, down from 2.5 percent the previous month. The fall was somewhat unexpected, with most forecasters predicting no change.

The statistics agency explained that the fall was largely due to lower air fares related to the earlier Easter this year. This year, much of the vacationing around the holiday began in late March as Easter Day fell on April 1.

Inflation has fallen more sharply than expected in recent months and that’s one reason why the bank did not raise interest rates again this month. The other was tepid growth of 0.1 percent in the first quarter of the year that the bank thinks was largely due to wintry weather.

Having spent much of this year hinting that the benchmark rate would rise a quarter of a percentage point to 0.75 percent, the bank’s nine-member Monetary Policy Committee voted 7-2 to keep rates on hold.

Though Bank of England Governor Mark Carney said Tuesday that inflation is likely to rise again in coming months due to a pick-up in oil prices, many in financial markets think another rate hike may be a long way-off not least with so much uncertainty over Britain’s exit from the European Union. The bank is tasked with setting interest rates to achieve inflation of 2 percent so its policy largely depends on how prices move.

“Inflation falling for the third month in a row further dents any hopes of a late-summer rate rise,” said Ben Brettell, senior economist at stockbrokers Hargreaves Lansdown.

Following the release of the inflation numbers, the pound was down 0.5 percent at $1.3352.

A weaker pound can stoke inflation in coming months as it raises the cost of imports like energy and food. It was the currency’s sharp fall after the Brexit vote in June 2016 that raised inflation from below 1 percent to a peak above 3 percent.

Some think there’s still a chance of a rate hike soon given that inflation is set to start rising again and growth could pick up.

“Provided GDP growth recovers, June’s inflation data likely will be strong enough to persuade a majority of MPC members to vote to raise rates in August, rather than wait until later in the year,” said Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics.

This article provided by NewsEdge.