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Bailey predicts ‘strong drop’ in inflation next month

Bank of England governor Andrew Bailey
Andrew Bailey remained optimistic on inflation despite markets paring back rate cut expectations - Julia Nikhinson/Bloomberg

Andrew Bailey has predicted a “strong drop” in inflation next month, even as official figures showed prices rose more quickly than expected in March.

The Governor of the Bank of England said inflation was “on track” to fall to 2pc within months, driven by cheaper household bills as the energy price cap falls.

Official figures showed inflation eased to 3.2pc in March from 3.4pc in February. However, the rate was slightly higher than predicted by economists.

Mr Bailey sought to allay concerns that the Bank of England would keep interest rates at 5.25pc for longer amid fear over persistent price rises.

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Speaking at an event in Washington organised by the Institute of International Finance, he said: “We’re actually pretty much on track for where we thought we will [sic] be in February.”

It suggests that the Bank’s prediction that inflation will fall to its 2pc target by the second quarter of the year is still on track.

Mr Bailey added: “Where we are today is we have [inflation] numbers falling. I expect that next month’s number will show quite a strong drop because we have a particularly unique energy to household energy pricing systems in the UK.

“So I would expect inflation to come down towards target. Where exactly around target, we’ll see.”

He said policymakers would continue to assess the appropriate time to cut rates “each time” they meet, with the next decision in just three weeks.

Mr Bailey stressed there were “still very big risks out there”, including instability in the Middle East. The Bank also expects inflation to pick back up in the second half of the year.

However, he added: “There has been quite a change in the UK situation. We are experiencing quite a pronounced period of disinflation, thank goodness.”

The Bank of England is now expected to cut interest rates twice this year, taking borrowing costs to 4.75pc by the end of 2024. At one point traders had expected five rate cuts.

Money markets indicate policymakers could wait as late as August before beginning to reduce borrowing costs.

Grant Fitzner, chief economist at the ONS, said: “Once again, food prices were the main reason for the fall, with prices rising by less than we saw a year ago. Similarly to last month, we saw a partial offset from rising fuel prices.”

The jump in fuel prices is likely to continue amid rising tensions in the Middle East, particularly after Iran’s recent attack on Israel.

Yael Selfin at KPMG warned that while inflation could soon return to the Bank’s 2pc target, risks remained high.

Ms Selfin said: “The overall outlook for inflation remains broadly positive, however there are several risks which could cause a setback.

“Oil prices have rallied over the past month which has led to an increase in prices at the pump for consumers. Also, the hike in the National Living Wage could potentially contribute to persistence in services inflation which remains elevated.”

Chancellor Jeremy Hunt said the latest fall in inflation was a sign that “the plan is working”.

Mr Hunt said: “Inflation is falling faster than expected, down from over 11pc to 3.2pc, the lowest level in nearly two and a half years, helping people’s money go further.”

Separate figures confirmed that inflation in the eurozone fell to 2.4pc in the year to March, down from 2.6pc the previous month. It paves the way for the European Central Bank to start cutting rates in the coming months.