UK inflation will plunge to 1.5% in May, ING economist predicts
EASING pressure from food and energy bills will help drive United Kingdom inflation down to 1.5 per cent in May, well under the Bank of England’s (BOE) target, according to ING Groep.
The bank’s market economist James Smith predicted that a “broad-based” drop in inflation in the coming months but warned that the BOE could hold off until the summer to cut interest rates.
A decline that sharp would drag inflation down to its lowest level in more than three years and below the BOE’s 2 per cent target. It would be a landmark moment for governor Andrew Bailey, who has faced criticism for his handling of the surge in prices.
The outlook on UK inflation – currently at 3.9 per cent – has brightened substantially in recent months with price pressures in Britain no longer an international outlier. Even so, Smith’s estimate is much more optimistic than the consensus in a survey of economists, which suggests inflation will eases slowly to 2.1 per cent by the second quarter of 2025.
Easing natural gas and food prices along with lower pressure on consumer goods are starting to ease the pace of inflation, according to ING. Fresh figures on Wednesday (Jan 17) are expected to show that inflation edged down to 3.8 per cent in December.
Even if inflation is undershooting the BOE’s target by the Spring, Smith cautioned that it may not lead to rate cuts in the first half of 2024, as markets are pricing in.
“The market risks getting ahead of itself by pricing a May rate cut, especially if tax cuts are announced in March,” said Smith, who expects the first reduction in August. “Services inflation needs to show more progress, and in the near term, we think it will remain stuck between 6 to 7 per cent.”
He added that a large fiscal boost to the budget in March may also tempt the BOE to wait before cutting rates. BLOOMBERG
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