British inflation surprisingly falls

12th April 2011, Comments 0 comments

British annual inflation unexpectedly fell to 4.0 percent in March from 4.4 percent in February, easing pressure on the Bank of England to follow the ECB in raising interest rates to combat high prices.

The Office for National Statistics (ONS) said Consumer Prices Index (CPI) inflation dropped from 4.4 percent, the highest level for more than two years, as supermarkets slashed prices of food and non-alcoholic drinks.

Analysts had forecast no change to the annual rate.

Following Tuesday's data, economists said the Bank of England's Monetary Policy Committee (MPC) was far less likely to raise its key lending rate, from a record-low 0.50 percent in the near future.

"The prospect of a May rate hike has been significantly reduced by today's surprise drop in UK CPI," said ING Bank analyst James Knightley.

"Rather than come in at 4.4 percent year-on-year as the market expected the March inflation rate dropped to 4 percent. It is still twice the Bank of England's target, but it makes an eventual 5 percent reading, which some officials had feared, look less likely."

The central bank's MPC last week held its key interest rate at 0.50 percent, in contrast to the European Central Bank (ECB) which raised eurozone borrowing costs for the first time in nearly three years.

"Today's surprise news may take some of the pressure off of the Bank of England's Monetary Policy Committee to raise rates next month," said Scott Corfe, an economist at the independent Centre for Economics and Business Research.

"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," he added.

The ECB last week sprang its first interest rate hike since July 2008 -- from an all-time low of 1.0 percent to 1.25 percent -- to tackle high inflation across the eurozone.

Inflation is even higher in Britain but because its recovery from recession has stalled, the Bank of England is adopting a wait-and-see approach before embarking on its own policy of rate tightening.

On Tuesday, the ONS added that CPI inflation rose by 0.3 percent in March from February on a month-on-month basis. Analysts had predicted a rise of 0.5 percent.

Separately, the British Retail Consortium revealed the biggest sales drop in its history, in a further sign that consumers' belt-tightening is hitting the high street hard.

With many shoppers focused on affording the essentials, the BRC said total sales for March were down 1.9 percent from a year ago, the steepest decline since it began its monthly survey in 1995.

© 2011 AFP

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