Bank of England Running Out of Reasons Not to Cut Rates: IEA

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There is an "urgent need for the Bank of England to begin cutting rates" says a think tank following another below-consensus UK inflation report.

According to the Institute of Economic Affairs (IEA) the renewed slowdown in inflation paves the way for annual inflation to fall below the 2% target in April, which would take it below the Bank's mandated 2.0% target.

The ONS said UK CPI inflation rose by 3.4% in the 12 months to February 2024, down from 4.0% in January and below the 3.6% expected by the consensus. This was also below the Bank of England's own forecast.

Core CPI (excluding energy, food, alcohol and tobacco) rose by 4.5% in the 12 months to February 2024, down from 5.1% in January and below expectations for 4.6%. Services inflation - an important metric for the Bank of England - eased from 6.5% to 6.1%.

"The latest drop in inflation demonstrates the urgent need for the Bank of England to begin cutting rates," says Julian Jessop, Economics Fellow at the IEA.

Economists are widely in agreement that inflation will fall below the Bank's 2% target in April when the new Ofgem cap on energy bills is cut.

"The consumer price index has been little changed since September, meaning that shorter-term measures of inflation are now close to zero. This is consistent with the sharp slowdown in the growth of money and credit," explains Jessop.

He concedes that some underlying measures are still high, notably annual services inflation which is running at 6.1%. "But with plenty of evidence that the labour market is cooling, and inflation expectations are dropping, fears of a ‘wage-price spiral’ should fade too."

The Bank has opted to maintain a cautious approach to considering interest rate cuts for fear inflation will rebound from April's sub-2.0% reading into year end, driven by services inflation.

Services inflation is responsive to wage increases, which are elevated by historical trends, and are another element of the economic mix the Bank is watching.

But Jessop says "by far the bigger risk" is that having been too slow to act when inflation was taking off, the Bank of England will now be even slower to respond on the way down."