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UK rate cut hopes dented after inflation falls to 2.3%

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UK inflation fell less sharply than expected to 2.3 percent in April despite falling energy prices, denting market expectations that the Bank of England will lower interest rates. at your next meeting.

The rise in the consumer price index was higher than the 2.1 percent forecast by the Bank of England and economists polled by Reuters, while services inflation (which the Bank of England is closely monitoring) also exceeded expectations. .

The overall figure was the lowest since July 2021 and below the March rate of 3.2 percent.

It was hailed by Prime Minister Rishi Sunak as a sign that the UK is winning its battle against inflation ahead of a general election due this year. He said the headline rate drop “marks an important moment for the economy, with inflation returning to normal.”

However, economists said the higher-than-expected reading meant the chances of a rate cut at the June 20 meeting of the Bank of England’s Monetary Policy Committee had diminished. The MPC has argued it needs more evidence that price pressures are easing before cutting rates from their current 16-year high of 5.25 per cent.

The pound rose 0.4 percent against the dollar to $1.2755 after the Office for National Statistics release.

Yael Selfin, chief economist at KPMG UK, said the headline reading was “within striking distance” of the Bank of England’s 2 percent target, but added: “This may not be enough to convince the most cautious members of the MPC to commit to a rate cut in June, especially while wage growth remains elevated and economic growth momentum is strong.”

Markets reduced the probability of a quarter-point rate cut in June from 50 percent to 15 percent, and a September rate cut is now only estimated at around an 80 percent chance.

Investors are now evenly divided on whether the Bank of England will implement one or two quarter-point cuts by the end of the year, having fully priced in two cuts before the inflation data was released.

Bank of England policymakers had forecast a sharp drop in inflation due to a reduction in the regulatory cap on household energy bills last month.

Data on the level of services prices will be a key factor, because the Bank of England considers it an important indicator of the strength of domestic price pressures.

The ONS reported that year-on-year growth in services prices was 5.9 per cent in April, down from March’s reading of 6 per cent. However, that was well above the 5.5 percent service price inflation rate forecast by economists and the Bank of England in its latest round of forecasts.

Tomasz Wieladek, economist at T Rowe Price, said the continued strength of services inflation meant the MPC would likely keep rates unchanged for now.

“Services CPI inflation is the best indicator of core inflation and remains uncomfortably high,” he said. “Today’s data clearly shows that markets were overly optimistic about a cut in June and remain overly optimistic about Bank of England cuts this year.”

Core inflation was 3.9 percent, above a 3.6 percent prediction by economists polled by Reuters. That was down from 4.2 percent the previous month.

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