UK inflation drop eases central bank dilemma ahead of Brexit
LONDON (AP) — Inflation in Britain eased markedly during September, official figures showed Wednesday, a development that lowers the pressure on the Bank of England to raise interest rates at a time when the country faces acute uncertainty from Brexit.
The Office for National Statistics said consumer prices were 2.4 percent higher in the year through September, down from 2.7 percent the previous month due to a fall in prices for food and non-alcoholic beverages.
Despite the decline, inflation remains above the Bank of England’s 2 percent-target, as it has largely done since the 2016 Brexit vote. And most economists expect it to remain above that level for a while yet, partly because of higher oil prices.
“The Bank of England will be desperate to leave policy unchanged until we get some clarity over Brexit, but two or three interest rate rises are tentatively penciled in over the next couple of years to bring inflation back to target,” said Ben Brettell, senior economist at stockbrokers Hargreaves Lansdown.
The central bank is not expected to change interest rates anytime soon given a lack of clarity surrounding Britain’s exit from the European Union in March. On Wednesday, Prime Minister Theresa May travels will meet her counterparts to find a way to break a deadlock in the talks on Britain’s exit.
Bank of England Governor Mark Carney has warned that the risk of a so-called “hard Brexit” that would see the country crash out of the EU without a deal has grown “uncomfortably high.”
It’s unclear how a sudden Brexit would affect interest rate policy — though rate cuts would be needed to help the economy through the turmoil, a disorderly departure could cause a further fall in the pound, pushing up prices. Rate increase could help, then, contain inflation.
The Bank of England has raised its benchmark rate twice over the past year, to 0.75 percent. It’s done so despite a slowing economy largely because inflation rose sharply in the wake of the Brexit vote, which led to a sharp fall in the pound and an increase in import prices.
Higher borrowing rates can reduce inflation several ways, one of which is by shoring up the value of the currency, thereby containing import cost pressures. Following Wednesday’s numbers, the pound fell 0.3 percent to $1.3142.