British inflation slowed last month to its lowest level in nearly three years, moving closer to the Bank of England's 2% target.
The Office for Statistics said on Wednesday that consumer prices rose 2.3% in April compared to the same month last year, down from a 3.2% rise in March. The rate of decline was slightly lower than economists expected and the lowest since July 2021.
The reduction was due to lower ceilings on household utility bills set by government regulators. Food inflation also slowed from 4% to 2.9%.
The sharp decline in headline inflation, which is moving closer to the central bank's target, signals that British policymakers have entered a new phase in their fight against inflation. Central bankers, who have been aggressively raising interest rates after prices soared due to pandemic lockdowns and energy market turmoil after Russia's invasion of Ukraine, are worried about how much inflationary pressure remains in the economy and how much. The government is trying to determine whether it can lower interest rates as quickly as possible.
This is a challenge shared by other major central banks. In the euro zone, policymakers have signaled interest rate cuts could come as early as this summer, while inflation remains relatively high in the United States.
In Britain, the central bank expects inflation to fall to 2.1% this month, before rising slightly and hovering around 2.5% for most of the year. But policymakers are scrutinizing growth in service prices and wages, traditionally stubborn components of inflation, with annual growth still uncomfortably strong at just under 6%.
Policymakers have signaled that interest rate cuts could begin in the coming months, as long as inflation broadly follows the latest forecasts. Two members of the rate-setting committee have already voted in favor of the rate cut.
On Tuesday, Kristalina Georgieva, managing director of the International Monetary Fund, said the fund had “a bit of good news for the UK” as it concludes its annual review of county economies.
The fund raised its forecast for UK economic growth this year to 0.7% from 0.5% last month, following an unexpectedly strong exit from recession earlier this year. For 2025, it predicted interest rates would fall and wages would grow faster than inflation, resulting in a growth rate of 1.5%.
Georgieva told a press conference in London that the measures taken by the British government and the Bank of England “combined with the favorable development in energy prices are paying off”. “The economy is growing, inflation is falling, and we see a soft landing,” he said of a situation where there is no painful recession and inflation slows.
The fund expects UK inflation to see a “sustainable return” to target by early 2025, and plans to cut interest rates from 5.25% to 4.75% or 4.5% this year, and a further 1% next year. Recommended.
But the long-term outlook for the UK economy was even bleaker. The foundation said weak labor productivity and the number of people leaving the job market due to long-term health problems were weighing on the outlook.
The fund also warned that UK authorities will likely have to make difficult choices to stabilize public debt, as public spending and investment are required to increase. It recommended against further tax cuts “as a matter of general principle”, despite the ruling Conservative Party's stated ambitions for further tax cuts ahead of a general election in the next eight months.
