Latest UK inflation fall matches Bank of England expectations, Bailey says

By Pete Schroeder

WASHINGTON (Reuters) – British inflation is broadly declining in line with the Bank of England’s forecasts, and next month’s numbers look on track for a sharp drop towards the central bank’s 2% target, Governor Andrew Bailey said on Wednesday.

“We’re actually pretty much on track for where we thought we would be,” Bailey said at an event in Washington hosted by the Institute of International Finance.

“I expect that next month’s number will show quite a strong drop,” he added.

After the BoE’s last interest rate-setting meeting in March, Bailey said inflation was “moving in the right direction” for a rate cut, and on Tuesday he said the question for policymakers remained when there would be enough evidence to justify this.

Official figures earlier on Wednesday showed annual consumer price inflation fell to 3.2% in March from 3.4% in February, a slightly smaller decline than the drop to 3.1% which was the median forecast in a Reuters poll of economists.

Last month the BoE said it expected inflation to fall below 2% in the second quarter of this year, due largely to a scheduled fall in regulated energy tariffs.

But it has forecast that inflation will rise back towards 3% later in the year due to continued strong wage growth and services price inflation, which some policymakers have said is a bigger factor for them in determining when to loosen policy.

Financial markets slightly scaled back their expectations for BoE rate cuts after Wednesday’s inflation data, and now have only one quarter-point rate cut fully priced in for this year, most likely in August or September.

Labour market data on Tuesday showed less of a fall in wage growth than economists had forecast but a bigger rise in the unemployment rate, which hit a six-month high of 4.2%.

Bailey said that overall the labour market appeared to be loosening, but problems with the official labour force survey made it hard to reach a firm conclusion.