Growth slows

Rate cut in balance as inflation remains sticky

high street shopping at Easter
Price growth is slowing and may herald cuts to borrowing (pic: Terry Murden)

Inflation has eased to 3.2% down from 3.4%, official figures have revealed, and is now at its lowest level since 2021.

The fall was driven by slowing food prices, partially offset by an upward contribution from motor fuel, but may not be enough to trigger an early cut in interest rates.

The latest reading is just above a broad consensus that it would fall to 3%, and attention will now turn to how the Bank of England may respond when it next considers interest rate cuts.

Warnings from the International Monetary Fund (IMF) about sticky inflation, particularly in the US, and global tensions disrupting trade, has forced many traders to push back their expectations to two interest rate cuts this year with the first in August rather than June.

There has been talk that the Bank of England will cut rates ahead of the US, despite the risk that the pound will fall and make imports more expensive. The latest data suggests it may also wait a little longer.

The Bank governor Andrew Bailey told the IMF in Washington last night that he had witnessed “strong evidence” that the process to reduce inflation was “working its way through”. 

He said: “We are seeing activity and resilience in the world economy, but we are seeing disinflation,” he said. 

“In the UK, we are disinflating at what I would say is full employment. But I see strong evidence now that the process is working its way through.”

Responding to the latest inflation figure, Chancellor Jeremy Hunt said: “The plan is working: inflation is falling faster than expected, down from over 11% to 3.2%, the lowest level in nearly two and a half years, helping people’s money go further.

“This welcome news comes on top of our cuts to national insurance, which save the average worker £900 a year, so people should start to feel the difference as well as see it in their pay cheques.”

Jeremy Hunt
Jeremy Hunt: the plan is working

Alpesh Paleja, CBI lead economist, said:  “While March’s fall in inflation was smaller than expected, it’s still likely to move closer to the Bank of England’s 2% target in the next few months.

“But the path beyond this will be bumpy – the CPI rate is likely to rise again in the second half of 2024, thanks to base effects from energy prices. 

“The Bank of England will look through these ups and downs, so it’s still likely that they will cut interest rates this summer. But it’s notable that inflation is now higher than the Bank expected, and in view of this they will also be keeping one eye on the resilience in pay growth.

“Recent developments in the Middle East could also slow the path of inflation back down, if they feed through to higher global energy prices.   

“Therefore, while it’s reasonable to expect some loosening in monetary policy ahead, this is by no means a done deal.” 

Danni Hewson, head of financial analysis at AJ Bell, said: “Expectation of a June cut has fallen back significantly and more than 50% now think even August will be too soon.”

Rob Clarry, Investment Strategist at wealth manager Evelyn Partners, said: “Cutting interest rates in this environment would likely lead to sterling deprecation, which would, in turn, lead to higher import prices and put upward pressure on UK inflation.

“As we enter the summer months, the Bank will continue to face a difficult balancing act between growth on one side and inflation on the other.”

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