Caution over rates despite fall in CPI

INFLATION has fallen to just 1.8 per cent - the slowest pace in more than a year. But the figure does not take into account the latest sharp rises in household energy bills or the spike in oil. It is thus unlikely to persuade the Bank of England's monetary policy committee (MPC) from keeping interest rates steady at 4.5 per cent.

The annual rate of consumer price inflation eased to 1. 8 per cent in March, compared with 2 per cent previously, which is also the target rate set for the MPC.

Reaction among City analysts was that the figures are unlikely to persuade policymakers to move interest rates in either direction. Surging household bills and record oil prices look set to push inflation back up in the coming months. This may prompt workers to demand higher wages and put further pressure on prices.

Inflation also eased in the eurozone last month. But this is unlikely to deter the European Central Bank from raising rates in June after a hike in March. The UK figures, from the Office of National Statistics, show the largest downward effects on the consumer price index (CPI) last month came from food and non-alcoholic drinks. These fell 0.4 per cent on the year, the weakest outturn since November 2004.

Within that, the price of milk fell by an average 2p per pint following reported price cuts at several supermarkets. There were also large downward effects from lower air fares and petrol pump prices holding steady, after rises a year ago.

However, there was a big upward push on the CPI from hefty price hikes by utility firms. The housing, water, electricity, gas and other fuels component rose at its sharpest annual rate in more than nine years.

Peter Dixon, economist at Commerzbank, said: "As far as the BoE is concerned, it is a welcome relief. But I don't think it shows we are in any need of a rate cut now. It really is a recipe for no change."

However, there was some support for the lone MPC interest rate dove, Stephen Nickell. S Ian Kernohan, economist at Royal London Asset Management, said: "The inflation data appears to support Steve Nickell's argument that the effect of slower economic growth will now begin to put downward pressure on inflation and that if the MPC does not cut rates, it risk undershooting the target."

But he added that Mervyn King, the Bank of England Governor, "would rather risk an undershoot than an overshoot, because of the effect the latter might have on inflation expectations. He will not vote for lower rates unless something major happens".

Policymakers may take comfort from the fact that retail price inflation (RPI) on which most pay deals are based, held steady at 2.4 per cent in March. and one crumb for comfort for households yesterday was a fall in the oil price after prices set a fresh all-time high above $74 a barrel earlier in the day.

Prices slipped as Royal Dutch Shell said it expected to restart a key Gulf of Mexico oil and gas field by the end of May, ahead of plan.

The 140,000 barrel-per-day Mars platform was badly damaged by Hurricane Katrina last year.

Brent crude eased $1.03 to $72.70 a barrel. Prices hit new peaks after the US government reported on Wednesday a larger-than-expected drop in gasoline inventories, adding to concern created by supply losses in Nigeria and the row over Iran's nuclear programme.

The drop in oil coincided with a dip in prices of industrial and precious metals.

Gold, which earlier touched $645.75 an ounce, the highest since November 1980, fell to $619.10. Copper and aluminium both shed 3 per cent.