As inflation hovers over the Bank’s 2% target and as expectations linger that the headline rate will increase later this year, the possibility of the central bank announcing reductions in interest rates in the next meeting, to be held in May, has increased.
The Bank of England may resort to reducing interest rates after inflation in the UK fell from 3% in January to 2.8% in February. As utility bills and grocery prices were on the rise, economists had predicted that inflation would fall to 2.9%, but the further drop certainly came as a welcome surprise. This figure represents the annual slow-paced increase in prices.
As inflation hovers over the Bank’s 2% target and as expectations linger that the headline rate will increase later this year, the possibility of the central bank announcing reductions in interest rates in the next meeting, to be held in May, has increased. City traders raised their bets on an interest cut, and financial markets are now predicting a 55% chance of the Bank lowering its base rate to 4.25% in the forthcoming weeks.
However, the Bank of England’s Monetary Policy Committee (MPC) are proceeding with caution, maintaining its 4.5% interest rate earlier this month, despite a strong push for a stimulus to bolster the stagnating economy, as the inflation forecasts predict a rise in the near future. The Office for Budget Responsibility (OBR) anticipates an average of 3.2% inflation rate, which could peak at 3.8% this year.
The Office of National Statistics (ONS) announced news of lowered inflation on the same day Rachel Reeves, Chancellor of the Exchequer, was set to deliver her spring statement. The Guardian reported that according to ONS chief economist Grant Fitzner, women’s clothing prices were the primary factor influencing a fall in inflation last month, with alcoholic beverages only partially counterbalancing it with relatively small increases. There were large increases in February, as households felt the pinch of nearly a 19% rise in the price of butter and a 17% increase in chocolate prices. Mobile and internet services, along with public transport tickets also recorded sharp increases.
With Britain’s economy stagnating, increasing household expenditure and Trump tariffs are an added strain on consumers. With Reeves presenting weak figures and forecasts for the economy, a reduced inflation rate was the only silver lining. However, given the overall health of the economy and the global economic and political challenges, this joy may be short-lived.
Analysts are assured that this decrease is a false spring, as wholesale energy costs, food prices and national insurance are expected to be among the notable price rises in the next month. Households must also grapple with increased council tax, utilities and other bills from April. The OBR has had to adjust its growth forecast for this year, slashing its prediction by half, from 2% to 1%. Anxiety looms in the business sector, as the increase in employer national insurance contributions which will also be implemented next month could compel companies to resort to layoffs and price increases.
While the February figures seem promising, financial experts are expecting March to also witness a drop in inflation to 2.5%. However, April predictions are set for an increase to 3% due to the 6.4% monthly rise in utilities and a sharp 26% jump in water bills. Not everyone is fully convinced that the central bank could cut interest rates, as The Independent reported that Thomas Pugh, an economist at RSM UK, said that reduced inflation will not necessarily result in changed interest rates because service inflation remained at 5% and that the MPC will be more concerned with inflation post-April when tax rises mentioned in the budget will come into effect.
Since the next meeting of the Bank of England is not until May, the MPC’s decision to alter interest rates will coincide with increased inflation and a plateauing domestic economy. Therefore, while this short-term decrease has resulted in some speculation, the chances of the Bank reducing interest rates are slim, given the long-term economic conditions in Britain.