UK Inflation Falls to Bank of England Target, Fresh Interest Rate Hikes on Halt Before Brexit Impasse

Reuters
'Domestically, the perceived likelihood of a no-deal Brexit has risen' since May, the BoE said in a statement after its Monetary Policy Committee (MPC) kept the central bank's main borrowing cost at 0.75 %.

Britain's inflation rate cooled in May and cost pressures in factories fell to a three-year low, according to data that might reassure the Bank of England (BoE) that there is no urgency to raise interest rates.

Consumer prices rose at an annual rate of 2.0% in May, matching the consensus of a poll of economists and following a 2.1% increase in April, the Office for National Statistics (ONS) said on Wednesday.

Stable inflation, combined with the lowest unemployment rate in 44 years and rising wages, has taken the edge off the uncertainty about Brexit for many households whose spending drives Britain's economy.

Britain's modest rate of underlying inflation is also helping the BoE to hold off on fresh interest rate hikes while it waits for the outcome of the Brexit impasse, although some officials in recent weeks have said increases may be needed sooner rather than later.

Core inflation, excluding energy, food, alcohol and tobacco, dropped to 1.7% in June, the lowest annual rate since January 2017. "Inflation eased in May, as travel prices such as air fares fell back after their Easter highs in April," ONS statistician Mike Hardie said.

Britain's inflation rate surged in 2017, pressured by the slump in sterling after the Brexit referendum in June 2016. It peaked at a five-year high of 3.1% in November 2017 but has now fallen back to the BoE's 2% target.

Britain's on-target inflation contrasts with the euro zone where the European Central Bank (ECB) has struggled to get inflation to match its target of just below 2%. ECB President Mario Draghi on Tuesday raised the prospect of further monetary stimulus to end the persistent undershoot.

The BoE announces its policy decision on Thursday but no economist polled expects it will raise interest rates. The ONS figures suggested less short-term pressure in the pipeline for consumer prices.

Among manufacturers, the cost of raw materials - many of them imported - was 1.3% higher than in May 2018, slowing from 4.5% in April and marking the weakest increase since June 2016. Economists had expected input prices to rise by 0.8%.

Manufacturers increased the prices they charged by 1.8% last month compared with 2.1% in April, broadly in line with the consensus forecast of 1.7% and similarly marking the lowest rate since September 2016. The ONS said house prices in April rose by an annual 1.4% across the United Kingdom as a whole compared with 1.6% in March. Prices in London alone fell 1.2%, the tenth consecutive fall.