Consumer prices rose 1.8 percent from a year earlier compared with 1.9 percent in July, the Office for National Statistics said today in London. Economists expected the rate to be unchanged, according to the median of 35 forecasts in a Bloomberg News survey. Inflation has slowed from a decade-high of 3.1 percent in March. Prices rose 0.4 percent compared with July.
The Bank of England, which signaled a month ago its benchmark interest rate may have to rise to curb inflation, is now facing an economy under threat from higher credit costs. Consumers are shouldering a record 1.3 trillion pounds ($2.6 trillion) in debt, a decade-long housing boom is cooling and the bank was last week forced to bail out mortgage lender Northern Rock Plc.
``The inflation picture has improved substantially over recent months,'' said George Buckley, chief U.K. economist at Deutsche Bank AG in London. ``With the crisis in the financial markets persisting, interest rates may well be cut earlier in 2008 than we expect.''
To ease a surge in overnight borrowing costs, the Bank of England today made 4.4 billion pounds in emergency funds to U.K. banks. The London interbank offered rate that banks charge each other for overnight loans in pounds dropped 33 basis points to 6.47 percent after the move.
Slower Growth?
The collapse of subprime mortgages in the U.S. has prompted lenders to hold back on loans to all but the safest borrowers. Customers of Northern Rock, the U.K.'s third-largest home-loan provider, today queued for a fourth day to withdraw their savings.
Slower inflation means the Bank of England may have scope to cut its benchmark rate from 5.75 percent if the credit rout continues. The central bank said Sept. 6 it expects inflation to stay around its 2 percent target in coming months, and Governor Mervyn King said six days later the turmoil may curb consumer prices and hurt economic growth.
The housing market is also showing signs of slowing. London house prices dropped the most in three years this month, a report from Rightmove Plc on Sept. 14 showed.
Reductions in mortgage exit fees and clothing prices led the slowdown in inflation, the statistics office said. Financial services costs declined 3 percent from a year earlier and prices in the clothing and footwear category dropped 3.5 percent. Food and beverage costs climbed 3 percent and an increase in ticket prices for live music and theater also spurred inflation.
Off the Agenda
The pound declined and traded at $1.9909 at 12:30 p.m. in London compared with $1.9950 before the report.
``A rate rise is now off the agenda,'' said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. ``Inflation numbers should be helpful for the next few months.''
The Bank of England has so far proved itself more reluctant than the European Central Bank or the U.S. Federal Reserve to take action against the market slump.
The Fed may cut its benchmark rate by a quarter percentage point to 5 percent later today, a Bloomberg News survey showed, and the ECB has held seven special cash auctions for banks since Aug. 9. The U.K. central bank announced its second such move today.
Investors have responded to the market slump by slashing forecasts for the bank's benchmark rate. The implied rate on the June futures contract was 5.55 percent today, down from 5.84 percent a month ago. The contract settles to the three-month London interbank offered rate for the pound.
Next Move
``I really struggle to find a reason why the Bank of England could possibly hike again,'' Rob Carnell, an economist at ING Wholesale Banking, said in an interview. ``The next move will be a rate cut.''
Bank of England policy makers are nevertheless still concerned economic growth will allow companies to raise prices. The economy will expand 2.9 percent in 2007, the most in three years, the International Monetary Fund predicted July 25.
The retail price index, a gauge used by labor unions when making wage demands, rose 4.1 percent in August from a year earlier, the statistics office said today.
Raw material costs are also rising. Oil prices climbed to a record $81.24 a barrel today and global wheat prices surpassed $9 a bushel for the first time last month.
Premier Foods Plc, the U.K.'s biggest producer of cakes and instant soup, said Sept. 4 it sees a ``substantial inflationary environment on food.''
Yields on U.K. inflation-protected bonds suggest traders expect inflation in Europe's second-largest economy to accelerate. The yield on inflation-indexed debt due in 30 years was 3.48 percentage points lower than that on 30-year gilts today, a gap that represents the rate of inflation investors expect over the life of the securities.
``There are a lot of upstream price pressures,'' said Alan Clarke, an economist at BNP Paribas SA in London. ``But we see the bank lowering rates once the inflation risks are squeezed out.''
