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UK inflation tumbles to 1.8%

Will they or won't they. Decision makers at the Bank of England may hold off raising interest rates in July as inflation eases
Will they or won't they. Decision makers at the Bank of England may hold off raising interest rates in July as inflation eases  

LONDON, England -- Lower food and gasoline prices pushed UK inflation to its lowest level in six months in May, reducing chances of an interest rate hike next month.

Retail prices rose 1.8 percent last month, down from a 2.3 percent increase in April, the Office for National Statistics said on Tuesday.

The May rate -- the lowest since November last year -- is better than the 2 percent rate most economists had expected and well below the Bank of England target level of 2.5 percent.

The ONS said lower seasonal food and petrol prices were responsible for last month's decline. Favourable weather has resulted in lower prices for fruits and vegetables, while gasoline costs have fallen along with a recent decline in crude oil prices.

The weaker than expected inflation numbers could convince the BoE's Monetary Policy Committee (MPC) to hold off raising interest rates at its July meeting. It cut its key rate seven times last year -- to the current level of 4 percent -- in an effort to prop up the economy, which had stagnated in the midst of a global slowdown.

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There has been growing speculation the MPC will need to hike rates, now at 40-year lows, to stop the economy from overheating as the recovery begins to take hold. The central bank has expressed concerns over booming consumer spending and rising house prices could begin to hurt the economy.

As recently as last week, the BoE Governor Edward George warned the central bank would have "no option" but to raise interest rates if domestic demand does not slow because that would generate inflationary pressures.

"At some point we will have to moderate the rate of growth of domestic demand," George told a parliamentary committee.

But a recent signs of a slow recovery in the UK's manufacturing sector and uncertainty in stock markets could convince the MPC to keep rates on hold for the time being.

Better than expected

"The figures are significantly better than expected and may call into question whether the MPC will raise interest rates at its July meeting,'' Philip Shaw, economist at Investec bank in London, told Reuters. "Clearly there are no inflationary pressures in the near term.''

Geoffrey Dicks, an economist at the Royal Bank of Scotland, said seasonally factors in May are not likely to be repeated in coming months and that inflation is still a threat.

But he agreed last month's low inflation rate could have an impact on the MPC decision in July.

"Presentationally, if for no other reason, this makes a rate hike in July that much more difficult. City forecasters who have been homing in on July will be backing off to August," he told Reuters.

The European Central Bank, which has also been hinting that rates in the 12-nation eurozone will soon have to rise, could face a difficult decision at its monetary policy meeting in July as well.

The ECB cut rates four times last year to the current level of 3.25 percent. It has been concerned that inflation would continue to exceed its target ceiling of 2 percent as the economy picked up steam.

However, the most recent numbers put eurozone inflation even with the ECB's target -- indicating the central bank may have to postpone a rate hike for another months or so.


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