Inflation in Britain fell in May as expected by the Bank of England (BoE). The BoE is also expected to keep interest rates unchanged this week while assessing the impact of global energy market volatility due to the escalating conflict in the Middle East.
Consumer prices rose by 3.4% annually in May, the Office for National Statistics (ONS) said on Wednesday, in line with economists’ expectations in a Reuters poll.
The data is not expected to change market expectations that the BoE will keep lending rates unchanged when it announces its June policy decision on Thursday.
After the data was released, the British pound rose slightly against the US dollar, while UK government bond yields fell, outperforming German and US bonds.
According to a Reuters analysis, Britain now has the highest inflation rate among the 16 Western European economies reporting EU-harmonized data for May.
The UK central bank, which has taken a “cautious” approach to cutting interest rates, is expected to reiterate that stance as the conflict between Israel and Iran enters its sixth day. Oil prices have risen by around 14% in just over a week.
“The focus will now shift to geopolitical events and rising energy prices,” said Sanjay Raja, chief UK economist at Deutsche Bank.
Services price inflation, the BoE’s main measure, fell to 4.7% from 5.4% in April, in line with the BoE’s forecast for May. A Reuters poll had previously forecast a reading of 4.8%.
Raja said the BoE would welcome the decline in its preferred core inflation measure, which excludes index and variable components such as rent and holiday, which has now fallen below 4% for the first time since February 2022.
Earlier this month, the ONS said its headline inflation reading of 3.5% in April had been incorrectly revised up by 0.1 percentage point due to an error in government vehicle tax data. Overall, goods prices rose by 2.0%, the highest rate since November 2023.
Some BoE officials said they disagreed with the central bank’s key assumption at its May meeting that the recent rise in inflation would not have a long-term impact on price behaviour.
Market prices on Wednesday indicated a 90% chance that the BoE would keep interest rates on hold this week, with two 0.25 percentage point cuts expected by the end of the year.
The BoE cut interest rates by 0.25 percentage points to 4.25% on May 8, in a three-way vote in the Monetary Policy Committee with two members supporting a larger cut, while the other two wanted rates to remain on hold.
The BoE in its statement in May expected inflation to peak at around 3.7% by the end of the year. But some economists believe April may have already peaked, unless the conflict in the Middle East continues to create higher price pressures.
