Inflation falls steeply: Here’s what economists think the BoE will do

Inflation fell in March in a further boost to British households who have suffered a year of real wage falls, but the Bank of England's job may have become trickier, according to economists.

Consumer price inflation (CPI) fell by 0.2 percentage points in March to hit 2.7 per cent. The Bank targets two per cent CPI.

Read more: Headache for Bank of England as inflation falls to lowest in a year

Here's how economists reacted.

Former Bank of England monetary policy committee hawk Andrew Sentance, now senior economic adviser at PwC, said ratesetters should hold their course. "Sluggish" productivity growth, wage increases and a "buoyant global economy" are likely to keep inflation above target for the rest of the year, he said.

"The Bank of England should not therefore treat this latest fallback in inflation as a dovish signal for interest rate policy. The MPC's approach has normally been to look through short-term fluctuations and focus on the longer term influences on the inflation outlook."

A graph showing inflation falling back from a peak in November

Hike is no longer a racing certainty

Howard Archer, chief economic advisor to the EY Item Club, said: "We believe the Bank of England is still more likely than not to hike interest rates to 0.75 per cent in May given that the MPC is keen to gradually normalise monetary policy, and will likely still see the recent weakness in the economy as largely weather-related.

However, it is now looking highly questionable as to whether there will be any further interest rate increases in 2018 after the probable move in May.

Neil Birrell, chief investment officer at Premier Asset Management, said: "Overall, this is likely to impact interest rate expectations. An increase in May is still very much on the cards, but the market will reduce its expectations further out. This has led to a drop in sterling and a rally in gilts, which may continue in the short term.”

Consumer spring

“Spring has arrived for consumers," said Ian Stewart, chief economist at Deloitte. "Brexit-related weakness in the pound is fading, and with it inflation. Coupled with rising wages and record levels of employment, this is a boost to spending power.

These numbers probably wont stop the Bank of England from raising rates next month, but sharply lower inflation eases the upward pressure.

Why the rush to hike?

Thomas Wells, manager of the Smith & Williamson Global Inflation Linked Bond Fund, said: “UK inflation has eased from the high levels seen in the fourth quarter, and we expect headline inflation to moderate further in the second half of the year, slowly moving back towards target, although the actual glide path from here will depend on what the Bank of England does with the Bank Rate.

"Todays data will raise questions as to why policymakers are so eager to raise rates in the short term," he added. "We know that inflation should ease over the course of this year; if consumption also falls or stagnates, the justification for higher rates could begin to erode quite quickly."

Paul Hollingsworth, senior UK economist at Capital Economics, said: "The fall-back in inflation in March probably wont prevent the MPC from hiking interest rates next month, although it perhaps makes it slightly less likely.

However, the committee is more focused on domestic cost pressures, and yesterdays labour market figures revealed a pick-up in regular (excluding bonuses) pay growth.

"In any case, the fact that inflation has fallen further means that real wages are likely to have strengthened more than expected, relieving some of the pressure on consumers which may make it easier for the MPC to raise interest rates further."

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