UK inflation falls more than expected; 2014 rate rise less likely

Tue Aug 19, 2014 9:24am EDT
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By Andy Bruce and Sarah Young

LONDON (Reuters) - British inflation fell more than expected in July and surging house price growth slowed in June, making it less likely the Bank of England will raise interest rates this year.

Inflation dropped to 1.6 percent in July from June's five-month high of 1.9 percent, according to official data that sent sterling tumbling to a four-month low against the dollar.

Last week, the BoE curbed expectations rates would rise in 2014 by slashing forecasts for wage growth. Any remaining pressure to raise record-low rates this year receded further after Tuesday's data.

"We view today's data as consistent with the mood music playing at present, which is that for now, a late-2014 increase in Bank Rate appears to be off the cards," said Victoria Clarke, economist at Investec.

Economists had expected consumer price inflation would tick down to 1.8 percent. The first annual fall in factory-gate prices since 2009 underlined the weakness in domestic inflation pressures.

Still, the outlook for inflation depends on estimates about the amount of slack left in Britain's economy, something that divides members of the Bank's Monetary Policy Committee.

Minutes for the MPC's August meeting are due on Wednesday and will be scrutinised for explicit signs of division, but most economists do not yet expect to see the first dissenting vote for a rate hike since July 2011.

Until last December, annual inflation had exceeded the Bank's 2 percent target every month since December 2009, eroding the spending power of households and making the fall in living standards a political issue before next year's election.   Continued...

Customers enter and exit a Tesco shop in central London December 8, 2011. REUTERS/Suzanne Plunkett