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IEA - Inflation data makes interest rate cut a lot easier

 Julian Jessop, Economics Fellow at the free market think tank, the Institute of Economic Affairs Commented on inflation falling to the Bank of England’s target of 2 per cent in May

“This inflation data does not guarantee that the Monetary Policy Committee will cut interest rates, but it would certainly make it a lot easier.

“The current interest rate of 5.25% risks unnecessarily slowing down the economy and is higher than necessary to bear down on remaining inflationary pressures. The Bank itself has been predicting that inflation will remain close to target, even based on market expectations of a string of rate cuts.

“Some MPC members will worry that underlying inflation is still much higher than 2%: the ‘core’ rate excluding food and energy was 3.5% in May and services inflation 5.7%. But these rates and the key underlying driver – wage pressures – are coming down. Inflation could increase later in the year because of the Ofgem cap on domestic energy bills and price rises in the Eurozone.

“But, with inflation now back on target, the MPC should not hesitate to cut interest rates, even during an election campaign. Importantly, the Bank should avoid the perception of political bias in either direction and make their decision on the basis of the better news on the inflation data.

“Most MPC members will probably still want to wait until August, when there will be much more evidence on the persistence or otherwise of inflation, and a new set of staff forecasts in the quarterly Monetary Policy Report. This is the market consensus too. But hopefully the MPC will spring a surprise tomorrow.
Inflation and the 2% target 
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