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Bank of England expects inflation to fall as pound hits 10-month high

LONDON, UNITED KINGDOM - 2022/09/28: General view of the Bank of England in the City of London, the capital's financial district. Bank of England has announced an emergency 65 billion pound bond-buying programme to calm markets. (Photo by Vuk Valcic/SOPA Images/LightRocket via Getty Images)
Huw Pill, the Bank of England's chief economist, believes that inflation will fall in the next quarter. Photo: Vuk Valcic/SOPA/LightRocket/Getty (SOPA Images via Getty Images)

The Bank of England’s chief economist said the central bank is predicting inflation to cool down in the second quarter of the year, as the pound hit a 10-month high.

“We still expect CPI inflation to fall in Q2, as large rises in energy prices from last year drop out of the annual comparison,” Huw Pill said in a conference speech.

Pill also said that pay growth has eased, across both the whole economy and the private sector.

The chief economist suggested that might be a sign that wage rises will ease this year as inflation falls.

Read more: UK inflation is 'bad luck', says Bank of England's chief economist

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“Moreover, high frequency indicators of momentum in wage developments appear to be easing,” he said.

“Three-month-on-three-month annualised private sector regular pay growth is 5.5%, its lowest level since December 21, and is now below the annualised rate,” he added.

The pound (GBPUSD=X) pushed higher against the dollar, trading at $1.25, the highest in over a week, approaching a 10-month high even though the economy recorded no growth in February.

The dollar weakened yesterday after US inflation dropped to its lowest in almost two years, boosting hopes that the Federal Reserve might stop raising US interest rates soon.

"It's all a bit of a broad dollar story today", said Simon Harvey, head of FX analysis at Monex Europe, describing the UK data as "fairly lagged" in terms of any kind of influence on monetary policy.

Prices rose unexpectedly in the UK last month after three consecutive months of slowing, driven by record food costs.

The Office for National Statistics (ONS) calculated inflation at 10.4% from January's 10.1% although it is still down from a 41-year high of 11.1% in October.

This was the first rise in UK inflation in four months. Economists had forecasted that inflation would fall to 9.9% in February.

Read more: Bank of England raises interest rates for 11th time to 4.25%

The Bank of England raised the UK interest rates last month by 0.25 basis points to 4.25% to combat double-digit inflation.

This is the 11th time in a row, in less than 18 months, that the central bank has increased rates, making borrowing costs higher despite the cost of living crisis that has hit UK households.

UK interest rates now stand at their highest since October 2008, early in the financial crisis, when Bank Rate was 4.5%.

The Bank of England will not be diverted from its fight against inflation by risks to financial stability from higher interest rates, governor Andrew Bailey said at an event in Washington.

“What we shouldn’t be doing is saying, we’ve got such a problem with financial stability that we have to aim off a decision on monetary policy because of conditions and financial stability,” Bailey said at the International Monetary Fund’s spring meeting.

The BoE’s chief economist also warned that the UK is still facing uncertain growth expectations, saying that the GDP probably contracted slightly in the first three months of this year.

“Activity in the UK remains subdued, as the level of GDP was flat over the month in February,” he said.

“Bank staff continue to expect GDP to decline by 0.1% in 2023 Q1, as had been projected in the February MPR [monetary policy report],” he added.

Watch: How does inflation affect interest rates?

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