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June 20, 2019

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Fall in UK inflation eases rate hike fears

Inflation in Britain dipped in May as transport costs returned to normal following an Easter-related boost, official figures showed yesterday, likely easing the pressure on the Bank of England to raise interest rates this summer.

The Office for National Statistics said yesterday that consumer prices were up 2 percent in the year to May, compared with 2.1 percent the previous month. It highlighted a sharp decline in transport-related inflation.

The fall means inflation is back at the Bank of England’s target of 2 percent and cements market expectations that the Bank of England won’t raise interest rates today. In recent weeks, policymakers have signaled that they are inclined to look past Brexit-related economic uncertainties and raise interest rates again — in contrast to the United States Federal Reserve and the European Central Bank, which have pointed to rate cuts.

Bank of England rate-setters have voiced concerns that a lack of spare capacity in the economy — it’s still growing, with unemployment at 45-year lows — and wage increases will stoke inflation.

However, with oil prices falling sharply in recent weeks, economists think inflation will fall further in coming months. As a result, few in the markets expect the central bank to increase its main interest rate from the current 0.75 percent today or even at its subsequent meeting in August.

The bank thinks wage pressures are likely to continue to build due to skills shortages and, as such, the Monetary Policy Committee’s interest rate statement today is expected to warn about the risks of inflation.

When rates move — up or down — will largely depend on what happens on the Brexit front. Britain is due to leave the European Union on October 31 and some of the Conservative Party candidates running to replace Prime Minister Theresa May have said they are prepared to leave on that date with no deal with the EU. Others have indicated they are prepared to back a delay.

As a result, there are big uncertainties surrounding the economic outlook and the path of interest rates. Even Brexit supporters say a no-deal Brexit will lead to “economic disruption.”


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