Inflation Declines Slower Than Expected, Dampening Hopes of Immediate Rate Cuts
Inflation fell more slowly than expected last month thanks to strong petrol and communication goods price pressures, casting doubt on hopes for immediate rate cuts by the Bank of England.
Despite a drop in the consumer price index to 3.2% in March, from 3.4% in the previous month, the rate of decline falls short of forecasts by City analysts and the central bank, signalling potential delays in monetary policy adjustments.
Strong price pressures in sectors such as petrol and communication goods contribute to the tempered decline in inflation, amplifying uncertainties about the timing of future rate cuts. While food and energy inflation ease, elevated prices in the transport and communications sectors keep the headline consumer price index higher than anticipated.
Grant Fitzner, chief economist at the Office for National Statistics (ONS), attributes the slower decline in inflation to high fuel costs, influenced by a sharp rise in international oil prices amid tensions in the Middle East.
The pace of inflation decline, exceeding the Bank of England’s forecasts, reinforces speculations that the central bank may defer rate cuts until later in the year. With services inflation dropping to 6% from 6.1% in February, and core inflation falling from 4.5% to 4.2%, the Bank may opt for cautious monetary policy adjustments, closely monitoring economic indicators and market dynamics.
Analysts predict a gradual return to the official 2% inflation target over the spring, driven by factors such as a reduction in the energy price cap. However, concerns about price pressures persist, fueled by increases in the minimum wage and household bills tied to inflation, alongside geopolitical tensions impacting international energy prices.
Market expectations for the scale of interest rate cuts by the Bank of England have significantly diminished, with investors now anticipating two or three reductions of 0.25 percentage points this year. Bank Governor Andrew Bailey emphasises the receding nature of UK inflation but underscores the need for careful consideration amid global economic dynamics, contrasting with the approach of the US Federal Reserve.
As the UK navigates through inflationary challenges and economic uncertainties, the pace and scale of future monetary policy adjustments remain subjects of intense scrutiny, with implications for economic growth, unemployment, and overall market stability.
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Inflation Declines Slower Than Expected, Dampening Hopes of Immediate Rate Cuts
