Inflation drop means interest rate rise unlikely in May

Grant Prior 11 years ago
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Fears of an imminent rise in interest rates eased today following a surprise fall in the headline rate of consumer price inflation to 4% from 4.4% in February.

The drop surprised City experts who were bracing themselves for an early rise in interest rates by the Bank of England to put the brakes on soaring inflation.

The fall in inflation was largely due to a record monthly decrease in the price of food and non-alcoholic drinks, which fell 1.4%, compared with a rise last year.

Retail Price Index (RPI) inflation – which includes mortgage interest payments – fell to 5.3% from 5.5% in February.

The Bank itself expects the inflation rate to pick up for the remainder of this year before falling back to its target rate of 2% by the end of next year.

Economists had expected the CPI rate to stay at 4.4% in March, or perhaps even rise slightly.

“It’s not only a surprise, it’s a very welcome surprise,” said Philip Shaw at Investec.

But although lower than its expectations, inflation is still twice the Bank of England’s target rate, and has now been one percentage point or more above target for 16 months.

This has led to calls for the Bank to raise interest rates – the policy tool used to combat rising prices.

“There is little cause for celebration as the inflation rate remains well above average and continues to exert significant pressure on household disposable income and discretionary spend,” said Neil Saunders, consulting director at research group Verdict.

Last week, the Bank’s Monetary Policy Committee (MPC) kept rates at a record low of 0.5% for the 25th month in a row.

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