Inflation forecast hit two-year low

Inflation in the UK is projected to have decelerated to a two-year low in February, and economists are cautioning that the Bank of England's 2 per cent target may not be met in the upcoming months. Read more: Inflation forecast hit two-year low

Mar 19, 2024 - 09:38

A senior Bank of England policymaker has warned the central bank could be forced to keep raising interest rates to prevent high levels of inflation from becoming entrenched in the economy.

Inflation in the UK is projected to have decelerated to a two-year low in February, with economists cautioning that the Bank of England’s 2 per cent target may not be met in the upcoming months.

Official data scheduled for release next Wednesday is anticipated to reveal that consumer prices inflation stood at 3.5 per cent last month, marking the slowest pace since September 2021 and a significant decrease from the 4 per cent recorded earlier this year.

In Britain, inflation has been steadily declining since reaching its peak of 11.1 per cent in October 2022. High interest rates and reduced global energy costs have tempered price growth, which has remained above the Bank’s 2 per cent target rate since July 2021.

Economists predict that February’s inflation rate will be influenced by low energy prices, a deceleration in food prices inflation, and a drop in used car values. They have also cautioned that robust disinflationary pressures and tight monetary policy could push inflation below the 2 per cent target this year, signaling the need for interest rate cuts.

Benjamin Nabarro, an economist at Citi, remarked, “Inflation is now on a path at least back to target, if not below.” He emphasized that data continues to move in a disinflationary direction. The Office for Budget Responsibility recently revised its forecasts, indicating that inflation would dip below the 2 per cent target in spring and remain at that level for the rest of the year. Conversely, the Bank’s forecasts suggest that inflation will rise in the second half of 2024 and only meet the 2 per cent target in 2025.

The Bank of England’s policymakers are set to announce their latest decision a day following the release of inflation figures. They are expected to maintain borrowing costs at 5.25 per cent and closely monitor inflation in the services sector, which has become a crucial factor in determining the future trajectory of interest rates. Nabarro estimates that services inflation, which was at 6.5 per cent in January, may decrease to 6 per cent in February.