People walk across Westminster Bridge in view of the London Eye in London, U.K. (Photographer: Simon Dawson/Bloomberg)

U.K. Inflation Drops More Than Expected to Slowest in a Year

(Bloomberg) -- U.K. inflation slowed to the weakest in a year in March, raising questions about how quickly the Bank of England will increase interest rates.

Consumer prices rose 2.5 percent from a year earlier, down from 2.7 percent in February, the Office for National Statistics said on Wednesday. That’s less than economists estimated and below the BOE’s most recent forecast of 2.8 percent for the same period. Core inflation cooled to 2.3 percent, also the lowest rate in a year.

The figures may weaken the case for more interest-rate increases later this year. Policy makers are widely expected to raise the benchmark for a second time in six months at their May meeting as inflation continues to exceed the 2 percent target.

U.K. Inflation Drops More Than Expected to Slowest in a Year

Officials have also said they’ll likely need to raise borrowing costs several times over the coming years as domestically generated inflation pressures pick up.

The pound tumbled after the data, sliding 0.7 percent to $1.4182 as of 10:19 a.m. London time.

While a hike next month is still almost fully priced in by markets, traders now see about a 40 percent chance of a follow up in November, down from more than 50 percent at the start of this week.

“The market is likely to question the likelihood of BOE rate hikes, both near term and later in the year,” said Alan Clarke, an economist at Scotiabank. “Even if the MPC does look through the low reading on this occasion and hike rates in May, this dilemma is likely to continue over the remainder of the year.”

For hawks at the BOE, labor-market data published Tuesday provided ammunition, with the jobless rate falling to its lowest since 1975 and wages rising at their fastest pace in almost three years.

What Our Economists Say

“An inflation undershoot would clearly give the central bank food for thought. But to throw the MPC off its current trajectory, it would have to be seen as persisting over its policy horizon. With tightness in the labor market showing no signs of letting up, that remains unlikely and leaves us continuing to expect another rate hike in November.”
--Dan Hanson and Jamie Murray, Bloomberg Economics
For more, see our U.K. React

Downward momentum on inflation came for women’s clothing, which rose at a slower pace than usual for this time of year, the ONS said. Alcohol and tobacco taxes also didn’t increase as usual after the government changed the timing of its annual budget announcement to the autumn.

Producer prices eased to the lowest rate since 2016, mainly due to smaller increases in food prices, the report said. Input prices gained 4.2 percent from a year earlier in March, driven by higher crude oil costs.

The ONS’s house-price gauge showed an annual gain of 4.4 percent in February, down from 4.7 percent in January. Prices in London fell for the first time since 2009.

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