Bank of England governor predicts ‘big drop’ in UK inflation in April

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The Bank of England expects “a considerable fall” in inflation to levels close to its 2 percent target when official figures are published on Wednesday, its governor said, while predicting that the next move in official interest rates by of the central bank would be a cut.

Andrew Bailey said falling energy costs should help reduce the rate of consumer price inflation when the Office for National Statistics publishes its April reading.

He added that Bank of England staff had in their latest outlook reduced their view on how persistent inflation is likely to be in the future.

The Bank of England and economists polled by Reuters expect the headline CPI inflation rate to fall to 2.1 percent in April, from 3.2 percent in March.

The figures will be crucial input to the Bank of England’s Monetary Policy Committee when its members meet next in June.

Some economists expect the MPC to cut rates from the current level of 5.25 percent in June.

April’s CPI reading will also be politically important, with Chancellor Jeremy Hunt claiming the UK economy is turning a corner following the cost of living crisis.

According to his allies, he should welcome the expected drop in price growth closer to the Bank of England’s 2 percent target as a sign that inflation is returning “to normal.”

They argue that before the price jump it was common for inflation to fluctuate just above or below the 2 percent target.

For Hunt, this return to “normality” will be presented as a sign of success for his economic policies.

Bailey was speaking after a lecture at the London School of Economics about how the Bank of England will handle the liquidation of its vast balance sheet.

He said he did not yet know what April’s CPI reading would be, but added: “I expect a big drop in the number,” partly due to moves in the regulatory cap on household energy prices.

“I don’t know if that will leave headline inflation on target or just above – we’ll see – but it will be much closer to target than before,” Bailey said.

He noted that Bank of England staff in their latest round of forecasts had raised their estimate of the proportion of the inflationary rise driven by high import costs, which are now fading.

Additionally, Bailey said the Bank of England had narrowed its view on how persistent inflation would be, and this was important when thinking about the timing of rate cuts. “I think the next step will be a cut,” she added.

His comments will fuel speculation that the Bank of England could be willing to lower rates as early as June, although upcoming readings on inflation and the strength of the labor market will be important.

Bailey was asked about the IMF’s recommendations in its latest Article IV review of the UK economy, among which was a suggestion that the Bank of England hold a press conference after each MPC meeting, in rather than just when it releases its full set of economic forecasts. .

Bailey acknowledged that the US Federal Reserve and the European Central Bank hold press conferences more regularly than the Bank of England about their monetary policy decisions. He said the Bank of England would consider the idea as part of its review of former Federal Reserve Chairman Ben Bernanke’s recommendations in his recent report on the Bank of England’s forecasts.