Inflation falls to 4 per cent in March
Economists tell Channel 4 News interest rates for home owners may stay on hold until the end of next year as inflation dropped unexpectedly last month to 4 per cent.
The Consumer Prices Index (CPI) rate of inflation was 4 per cent in March, down from 4.4 per cent in February.
The fall was unexpected but inflation is still double the Government’s 2 per cent target.
City analysts had expected the CPI rate to hold at 4.4 per cent.
The drop in the cost of living was driven by falling food prices which slipped 1.4 per cent.
The improved figures will be welcomed by the Bank of England‘s Monetary Policy Committee (MPC) which has been under pressure to raise interest rates from their historic lows of 0.5 per cent as it battles with stubbornly-high inflation.
Last week, the MPC held interest rates for the 25th month in a row as it faced a challenging mix of soaring inflation and sluggish economic growth.
The latest figures will further alleviate pressure to raise interest rates imminently – even though the Bank itself has forecast inflation hitting 5 per cent in the coming months.
Biggest drop since 2007
The fall in inflation was the biggest month-on-month drop since between June and July 2007 as supermarkets rolled out heavy discounts to draw in cautious consumers.
I am encouraged. There is a problem and we are importing a lot of inflation. Vince Cable, Business Secretary
Business Secretary Vince Cable said the unanticipated drop was encouraging and said the Bank of England had “kept its nerve” in the face of global inflationary pressures.
“I am encouraged. There is a problem and we are importing a lot of inflation.
Our long held view is that interest rates will remain on hold. Samuel Tombs, Capital Economics
“But the Bank of England has kept its nerve and I think they deserve great credit for that. They are looking ahead, not just looking at today, and they have kept interest rates low, which is what the economy needs.”
Samuel Tomb, a UK economist at Capital Economics told Channel 4 News that today’s figures eased the pressure on the MPC to raise interest rates.
“Our long held view is that interest rates will remain on hold. We forecast until the end of 2012 and think the Bank of England could hold out until then.”
He added: “It is likely that inflation will rise towards 5 per cent in the coming months but we expect it to fall sharply next year.”
Despite the fall in inflation, the squeeze on our living standards is still very real writes Channel 4 News' Economics Editor Faisal Islam.
So inflation has fallen! Hurrah! The inflationary dragon is tamed. It is now "only" double the target with the Consumer Price Index now 4 per cent for March according to today's figures.
Yet this is likely to be a temporary pause before a resumption towards 5 per cent next month, when the full effect of Budget excise hikes is passed into the stats.
Read more: Inflation falls but consumers still feel financial pain.