U.K. Inflation Slows On Need For More Stimulus

U.K. inflation slowed more than economists forecast in April, cooling to a level that relieves Bank of England Governor Mervyn King of the task of writing a letter to the government.

Consumer prices rose 3 percent from a year earlier, down from 3.5 percent in March, the Office for National Statistics said today in London. The rate is within the government’s boundaries for the first time since February 2010.
The inflation slowdown came as the International Monetary Fund said the Bank of England should add to stimulus for the economy. While the central bank halted its so-called quantitative-easing program this month, King left the door open to more bond purchases at a press conference last week as the central bank lowered growth forecasts.

“These figures give the Monetary Policy Committee slightly more leeway to undertake more QE to cushion the U.K. economy from the euro-zone turmoil,” said Vicky Redwood, an economist at Capital Economics Ltd. in London. “We expect core price pressures to ease further in response to contracting output and weak pay growth.”

The pound extended its decline against the dollar after the data was published and the IMF said Britain requires further monetary easing. Sterling dropped as much as 0.5 percent to $1.5764 and was trading at $1.5785 as of 10:52 a.m. in London. The 10-year gilt yield rose 2 basis points to 1.86 percent.

“There are more tools that can be used from a monetary policy point of view,” IMF Managing Director Christine Lagarde said in London after the fund published its annual review of the U.K. “It has quantitative easing measures available that could be resumed. We also believe that there is room in terms of interest rates that could be used as well.”
The Bank of England held its bond-purchase target at 325 billion pounds ($512 billion) this month and kept its key interest rate at a record-low 0.5 percent. Minutes of the meeting, showing how officials voted, will be released tomorrow.

From the previous month, consumer prices rose 0.6 percent in April, the statistics office said. The decline in the annual rate was due to the timing of the Easter holiday and prices changes in the transport, alcohol and clothing categories.
Core inflation, which excludes alcohol, food, tobacco and energy prices, slowed to 2.1 percent from 2.5 percent. Retail- price inflation, a measure used in wage negotiations, eased to 3.5 percent from 3.6 percent. The retail-price index excluding mortgage-interest payments showed an annual gain of 3.5 percent, Bloomberg reported.