U.K. Inflation Holds at 2.5%

The U.K.'s inflation rate stayed at 2.5 percent in March, less than economists forecast, giving the Bank of England scope to cut interest rates further.
TradingEconomics.com, Bloomberg 4/15/2008 6:38:50 AM

The result matched the reading for February, which was the highest in nine months, the Office for National Statistics said today in London. Economists predicted an increase to 2.6 percent, according to the median forecast of 37 economists in a Bloomberg News survey. Prices rose 0.4 percent on the month.

The pound dropped to a record low against the euro on speculation of further rate reductions after the data and another report that showed the housing-market slump deepened to the worst since at least 1978. Policy makers said slower economic growth will help keep prices in check as they cut the main U.K. interest rate for the third time since December last week.

The pound fell to a record low of 80.64 pence per euro, and dropped as much as 0.3 percent against the dollar. It traded at $1.9683 and 80.5 pence per euro as of 11:22 a.m. in London.

JPMorgan Chase & Co. brought forward its forecast for the next U.K. interest-rate cut to May from June after today's reports on the housing market and inflation. Chief U.K. Economist Malcolm Barr said in a note that the benchmark rate will fall from the current 5 percent to reach 4.5 percent in July.

U.K. Inflation has now exceeded the bank's 2 percent target for six months. Lower prices of furniture, games and toys offset record annual increases in transport costs and higher domestic heating bills, the statistics office said.

The retail price index, which is used in wage negotiations and includes a measure of house prices, fell to 3.8 percent in March from 4.1 percent the previous month. In addition to the factors affecting inflation, it dropped because of lower mortgage interest payments as banks passed on interest-rate cuts to borrowers, the statistics office said.

U.K. employees have struggled to win bigger pay raises, lessening the risk that faster inflation will become entrenched. The statistics office will probably say tomorrow that wages, including bonuses, probably rose 3.6 percent in the quarter through February, the weakest pace in seven months, according to the median estimate of 31 economists.

Consumer inflation expectations haven't shown signs of moderating. Britons' forecasts for prices in the next year rose to the highest since at least 2005 last month, according to a YouGov Plc survey commissioned by Citigroup Inc.

Higher energy and food costs threaten to stoke inflation further. Oil prices have doubled in the last five years, reaching a record $112.48 today. Northern Foods Plc, the U.K. maker of Goodfella's frozen pizzas, said March 27 that annual profit will exceed analysts' estimates after it was able to pass along higher ingredient costs to customers.


U.K. Inflation Holds at 2.5%