UK Inflation Eases, Bank of England Remains Cautious on Energy and Iran Impact
UK inflation fell to 2.8% year-on-year in April, the lowest in more than a year, lower than the 3% forecast. Services inflation, an indicator of core price pressures, was 3.2%, the lowest since January 2022. This decline was driven by more favorable year-on-year comparisons, government subsidies, and lower electricity and gas prices.
Although fuel prices rose 23% due to the US-Israel-Iran conflict, household costs were partially cushioned by the energy cap. This policy will be renewed in July and is expected to rise 13%, so cost-of-living pressures are likely to increase in the coming months.
Market expectations for a Bank of England interest rate hike in June fell below 20%, compared to around 50% last week. Investors also adjusted their estimates for total rate hikes throughout 2026, reflecting a reduction in near-term inflation risks.
10-year gilts surged in early trading, lowering yields by six basis points to 5.07%. The pound sterling weakened 0.1% to $1.3376, signaling market caution despite a temporary easing in core inflation.
The labor market adds complexity to the Bank of England's (BOE). The UK cut more than 140,000 jobs through April, while youth unemployment rose to its highest level since 2015. This requires the BOE to carefully balance inflationary pressures and economic growth.
Chancellor Rachel Reeves will announce household support measures, including a freeze on supermarket food prices. The BOE has prepared three inflation scenarios related to the impact of the Iran war: a median scenario peaking at 3.7% by the end of the year, and a pessimistic scenario rising to 6.2% in early 2027, remaining above the 2% target. Producer data also shows rising price pressures due to rising energy and raw material costs. (Arl)
Source: Newsmaker.id
