British inflation remained unchanged at 2.8% in May, holding at its lowest level in 13 months and coming in below forecasts from both economists and the Bank of England ahead of the central bank’s latest interest rate decision.
The weaker-than-expected inflation reading prompted a modest decline in sterling against the U.S. dollar, while UK government bond yields fell to their lowest level in two months. Investors also slightly reduced expectations of a Bank of England interest rate increase later this year.
Economists surveyed by Reuters had expected inflation to rise to 3.0% in May, while the Bank of England had forecast a jump to 3.3% amid concerns that the U.S.-Israeli conflict with Iran would continue to push energy costs higher and keep inflation elevated.
According to the Office for National Statistics, lower prices for meat, vegetables, dairy products and domestic heating oil helped offset increases in airfares and petrol costs during the month.
Inflation has remained above the Bank of England’s 2% target for much of the past five years. In April, the central bank warned that inflation could rise above 3.5% by the end of the year and potentially exceed 6% under its most severe economic scenario.
However, financial markets have recently been reassured by progress towards an interim agreement between the United States and Iran, which is expected to reopen the Strait of Hormuz, a key global oil shipping route, reducing concerns about further energy price shocks.
Economists said the latest inflation figures strengthen the case for a cautious approach from the Bank of England, with underlying price pressures showing few signs of accelerating significantly.
Market expectations remain that the Bank’s Monetary Policy Committee will vote 7-2 to leave interest rates unchanged at 3.75% at its latest policy meeting.
While Governor Andrew Bailey has indicated that policymakers have time to assess the economic impact of the Middle East conflict, some members of the committee remain concerned that businesses could use higher energy costs as justification for broader price increases or that persistent inflation could weaken public confidence in the Bank’s ability to maintain price stability.
