Britain’s inflation rate slowed last month to its lowest level in about three years, approaching the Bank of England’s 2 percent target.
Consumer prices rose 2.3 percent in April from a year earlier, down from 3.2 percent in March, the Office for National Statistics said on Wednesday. The rate, which declined slightly less than economists expected, was the lowest since July 2021.
It was pulled down by a decrease in the cap on household energy bills set by a government regulator. Food inflation also slowed to 2.9 percent, from 4 percent.
The steep decline in headline inflation, closing in on the central bank’s target, signals a new phase in British policymakers’ battle against inflation. Having aggressively raised interest rates after prices soared following pandemic lockdowns and the turmoil in energy markets after Russia’s invasion of Ukraine, central bankers are trying to determine how much inflationary pressure is left in the economy and how soon they can cut interest rates.
It’s a challenge shared by other major central banks. In the eurozone, officials have signaled rates cuts could come as soon as this summer, whereas in the United States, inflation remains relatively hot.
In Britain, the central bank expected inflation to fall to 2.1 percent this month, then bounce a little higher and fluctuate around 2.5 percent for much of the rest of the year. But policymakers are scrutinizing services prices and wage growth, traditionally stubborn components of inflation, which remain uncomfortably strong at just below 6 percent annual growth.
Policymakers have indicated that as long as inflation broadly follows their latest projections, rate cuts could begin in a few months. Two members of the rate-setting committee have already voted for cuts.
On Tuesday, Kristalina Georgieva, the managing director of the International Monetary Fund, said the institution was “delivering a little bit of good news for the U.K.” as it ended its annual review of the country’s economy.
After an unexpectedly strong exit from a recession at the start of this year, the fund raised ts forecast for Britain’s economic growth this year to 0.7 percent, from 0.5 percent a month ago. For 2025, it forecast 1.5 percent growth, with interest rates falling and wages growing faster than inflation.
Actions taking by the British government and the Bank of England, “combined with favorable energy price developments, are paying off,” Ms. Georgieva said at a news conference in London. “The economy is growing, inflation is falling and soft landing is in sight,” she said referring to a situation in which inflation slows without a painful recession.
The fund expects inflation in Britain to make a “durable return” to target by early 2025 and recommends cutting interest rates from 5.25 percent to 4.75 percent or 4.5 percent this year, and by another 1 percentage point next year.
But the longer-term prospects for Britain’s economy were gloomier. Weak labor productivity and the number of people who are out of the job market because of long-term health problems are weighing on the outlook, the fund said.
The fund also warned that British officials will probably need to make difficult choices to stabilize public debt, because of the demands on increased public spending and investment. It advised against more tax cuts “as a general principle” even as the governing Conservative Party has stated its ambition to further cut taxes ahead of a general election that has to take place within the next eight months.
