The Bank of England's monetary policy committee is likely to be cautious about raising rates next month. Photograph: Stefan Rousseau/PA
Alan Clarke, UK economist at BNP Paribas
The key reason for the deceleration was food, which saw its respective year-on-year
inflation rate slow to 4.6% from 6.3% the prior month. Although petrol prices rose sharply, this was set against the same size increase a year ago, which neutralised the impact on year-on-year inflation. It will be a similar story next month given the 4.5% month-on-month increase in petrol last April.
Sadly, we expect this slowdown to be short lived and inflation is likely to resume its upward trajectory from next month onwards – with CPI inflation still approaching 5% year on year by the end of the year and RPI inflation above 6% year on year. In particular, it is looking increasingly likely that domestic utility bills will rise by close to 10% later in the year given the path of wholesale gas prices. Similarly, the acceleration in the CPI component for food has not yet caught up with the jump in agricultural commodity prices.
Hence these data don't change the outlook for inflation over the remainder of the year. However, this is likely to represent one of the final nails in the coffin for a rate hike at the May MPC meeting. The most recent indicators for first-quarter GDP data point to big downside risks and the consumer looks very weak. We know that a number of members on the MPC, in particular the governor, are reluctant to hike and these latest inflation figures may well give the MPC the breathing space it needs to hold fire for now.
David Kern, chief economist at the British Chambers of Commerce
These figures were much better than expected, despite the continued sharp increases in global oil and commodity prices. The fall in inflation points to sharp competitive pressures in the high street, and confirms our assessment that businesses are unable to increase prices while disposable incomes are being squeezed.
We cannot afford to be complacent, as inflation is still double the government's target of 2%. But this improvement supports the case for the MPC to postpone interest rate increases until the recovery is more secure and the deficit-cutting measures have been absorbed. There is now a realistic hope that the MPC will be persuaded not to raise
interest rates in May.
Howard Archer, chief UK economist at IHS Global Insight
Once again, there is a major surprise on the inflation front. But for once it is a pleasant surprise.
The unexpected retreat in Consumer Price Inflation to 4.0% in March from 4.4% in February provides some merciful relief for the
Bank of England on the inflation front and eases pressure for an interest rate hike as soon as May. And with the British Retail Consortium reporting extremely weak retail sales in March, there is a clear case for holding interest rates down at 0.5% to help the economy withstand the increased fiscal tightening that really kicked in from early April.
It is far too early to say that we are coming out of the inflation woods, particularly given the current level of oil prices and the risk that they could go higher still. It is also probable that inflation was limited in March by Easter occurring a month later this year. So it is still very possible that inflation will move higher in the near term.
Nevertheless, the March inflation data does suggest that retailers may be coming under increasing pressure to price more competitively to get struggling consumers to spend and it is supportive to the argument that inflation will fall back appreciably once the upward impact from VAT developments, high energy, commodity and food prices, and sterling's past sharp depreciation wanes. In addition, below-trend economic activity and ongoing muted wages are expected to limit underlying inflationary pressures.
We currently expect the Bank of England to delay raising interest rates from 0.5% to 0.75% until August given the major uncertainties and concerns about the underlying strength of the UK economy and its ability to withstand the fiscal squeeze.
Furthermore, we believe that the easing back in consumer price inflation in March and mounting evidence that consumers are retrenching means that there is a growing likelihood that the bank could hold fire until November given the weakness of consumer spending.
Even if interest rates do rise in the near term, the probability remains that they will move up relatively gradually and stay very low compared to past norms. We see interest rates only rising to 2% by the end of 2012. Monetary policy will need to stay loose for an extended period to offset the impact of the major sustained fiscal squeeze. In addition, we do believe that inflation will fall back markedly later on in 2011 and 2012 as relatively modest, below-trend growth and elevated unemployment limits underlying inflationary pressures. In particular, ongoing substantial pressures on consumers are likely to limit both growth and inflation.
Scott Corfe, CEBR economist
This surprise news may take some of the pressure off the Bank of England's monetary policy committee to raise rates next month. Still, with consumer price inflation at double the Bank's central target, there are plenty of reasons for inflation hawks to remain concerned about the Bank losing credibility. Furthermore, the price of Brent crude oil has risen above $120 per barrel this month – and to an all-time high in sterling terms – which could push April's annual inflation figure back up.
On the other hand, the Bank has good reason to remain cautious about raising rates too soon. Today's
BRC retail sales data, which showed that like-for-like retail sales in March 2011 were 3.5% lower than the same month a year ago, is strongly illustrative of the significant financial squeeze on UK households at present. Indeed, we expect a fall in real consumer spending this year, unlike the Office for Budget Responsibility. The weakness of consumer demand may itself place downward pressure on prices over the coming months, negating the need to tighten monetary policy. On balance, we think the likelihood of a rate rise in May has been significantly diminished by today's data.
James Knightley of ING
The prospect of a May rate hike has been significantly reduced by the surprise drop in UK CPI. It is still twice the Bank of England's target, but it makes an eventual 5% reading, which some officials had feared, look less likely.
Given today's sharp drop in BRC retail sales, a lower inflation profile may make some of the officials who are on the fence right now opt for no change again next month.
We remain negative on the UK's growth prospects and believe that inflation in two years' time will be below target, but the BoE is in general more cautious. Nonetheless, the lower CPI number has clearly dented the prospect of a near-term rate hike and so it will be the GDP numbers and the Purchasing Managers' Index (PMI) figures in the days leading up to the May MPC decision that will be the deciding factors.
We suggest a GDP figure of around 1% quarter on quarter and PMIs in excess of 55 would be required to get a majority in favour of a very modest hike.
Hetal Mehta of Daiwa Capital Markets
When it comes to inflation, a surprise on the downside is not something we have had for a very long time. So the unexpected fall is welcome, and will take some pressure off the MPC, further diminishing the prospects of a May rate increase.
However, inflation still remains twice the Bank's target, while we expect the current record sterling oil price to push up consumer price inflation to well above 5% by the middle of the year. But this will be only temporary and inflation will fall markedly in January next year once the VAT increase falls out of the calculations.
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