LONDON (Reuters) - British inflation hit its highest level in more than a year in June but the rise was less than expected, giving the Bank of England a touch more leeway to support the country’s fragile economic recovery.
Tuesday’s reading of 2.9 percent spares new Bank Governor Mark Carney from having to explain formally why inflation is above target, and potentially strengthens his hand to reassure consumers, businesses and financial markets that interest rates are unlikely to rise any time soon.
“With no letter (to the chancellor about inflation) required, it makes it marginally easier to introduce more formal forward guidance at the next policy meeting,” Rob Wood, economist at Berenberg Bank, said.
The rise in consumer prices compared with inflation of 2.7 percent in May and was the highest since April 2012, the Office for National Statistics data showed.
Analysts in a Reuters poll had expected inflation to touch 3.0 percent in June, due in part to a big fall in petrol prices in June last year.
Economists said inflation, which has held above the central bank’s target of 2 percent for most of the past five years, had probably peaked for the foreseeable future.
At its July 3-4 policy meeting, the central bank voted against reviving its bond-buying stimulus programme. Some policymakers have cited persistently high inflation as a reason for their opposition to giving more help to the economy.
Minutes of July’s policy meeting are published on Wednesday and will show how Carney cast his first vote on the issue.
“We’re likely to see the Bank of England’s inflation projections coming down in next month’s inflation report and hence it takes away another potential barrier for more QE (quantitative easing bond-buying),” said Philip Shaw, an economist with Investec in London.
Another way Carney and the Bank could help the recovery would be to provide long-term guidance about how long interest rates are likely to remain at their record low of 0.5 percent.
Details of such ‘forward guidance’, which some argue would remove an uncertainty dragging on consumer spending, could be announced in August.
After the inflation numbers, the pound slipped against the dollar and the euro and British government bond prices rose, suggesting markets viewed the data as supportive of continued loose monetary policy.
Sterling fell further and bond prices added to their gains after Paul Fisher, one of the bank’s most dovish policymakers, told MPs that further stimulus was on the agenda.
“All the discussions that we’re having at the moment are more about whether we should be giving forward guidance..., whether we should be giving more stimulus, rather than discussing what the exit strategy will be,” he said.
Carney, who took over the Bank this month, would have been required to write a formal letter to Chancellor George Osborne if inflation had risen more than one percentage point above the Bank of England’s target.
Persistently high inflation has eaten into the purchasing power of British workers whose pay has mostly failed to keep pace and raising questions about how long recent signs of economic recovery can last.
One of the few major Western central banks facing the problem of high inflation, the Bank has previously said it expected price growth to peak at more than 3 percent due to the higher cost of imported goods and raw materials caused by sterling’s fall against the dollar since the start of the year, and by higher utility bills.
“We are looking at a fairly moderate inflation profile for the second half of the year,” said Peter Dixon, an economist at Commerzbank.
The Bank has said inflation would exceed its 2 percent target until early 2016, pushed up by long-term rises in energy prices and university tuition fees.
June’s increase in annual inflation was driven by clothing and footwear and fuel prices. The pace of price rises was slowed by weaker gains in air transport and food.
Separate figures published by the ONS showed pipeline inflation pressures were benign. Factory gate inflation was 2.0 percent in June compared with the same month last year, a touch stronger than analysts’ forecasts.
Excluding food, fuel and other volatile prices, the producer price index rose 1.0 percent year-on-year, a touch weaker than a forecast of 1.1 percent.
Additional reporting by Olesya Dmitracova, Max de Haldevang and Mark Anderson; Editing by John Stonestreet, Ron Askew