Commenting on inflation falling to the Bank of England’s target of two percent in May, Julian Jessop, an economics fellow at the free market think tank, the Institute of Economic Affairs, said: “This inflation data does not guarantee that the Monetary Policy Committee will cut interest rates, but it would certainly make it a lot easier.”
Mr Jessop said the current interest rate of 5.25 percent risks “unnecessarily” slowing down the economy and is higher than necessary to bear down on remaining inflationary pressures.
He continued: “The Bank itself has been predicting that inflation will remain close to target, even based on market expectations of a string of rate cuts.
“Some MPC members will worry that underlying inflation is still much higher than two percent: the ‘core’ rate excluding food and energy was 3.5 percent in May and services inflation 5.7 percent.
“But these rates and the key underlying driver – wage pressures – are coming down. Inflation could increase later in the year because of the Ofgem cap on domestic energy bills and price rises in the Eurozone.”
However, he noted that, with inflation now back on target, the MPC “should not hesitate” to cut interest rates, even during an election campaign.
Mr Jessop said: “Importantly, the Bank should avoid the perception of political bias in either direction and make their decision on the basis of the better news on the inflation data.
“Most MPC members will probably still want to wait until August, when there will be much more evidence on the persistence or otherwise of inflation, and a new set of staff forecasts in the quarterly Monetary Policy Report. This is the market consensus too. But hopefully the MPC will spring a surprise tomorrow.”
