UK Inflation Slows in May but Falls Short of Expectations, Supporting Rate Hold Outlook
Inflation in the United Kingdom eased in May, strengthening expectations that the Bank of England (BoE) will maintain its current interest rate when it announces its monetary policy decision on Thursday.
According to data released by the Office for National Statistics (ONS), the Consumer Price Index (CPI) fell to 3.4% in May, down from 3.5% in April — the highest level in 15 months. However, this decline was smaller than the 3.3% projected by analysts surveyed by Bloomberg News.
This slowdown comes amid broader economic fragility, as recent figures showed the UK economy contracted by 0.3% in April, a steeper-than-expected decline. The contraction was partly attributed to increased corporate taxes and a sharp fall in exports to the United States, impacted by U.S. trade tariffs.
Despite signs of economic weakness, most market participants expect the BoE to keep its key interest rate unchanged at 4.25%, with insufficient grounds for a rate cut in the near term.
A key focus for the BoE — services inflation — also declined, falling to 4.7% from 5.4% in April, aligning with the central bank’s forecast. A Reuters poll had projected a reading of 4.8%, suggesting that while the data shows moderation, it remains well above the BoE's 2% target.
Earlier this month, the ONS acknowledged that April’s inflation figure was overstated by 0.1 percentage points due to an error in vehicle excise duty data. While the April figures were not revised, corrected data were used in the May release.
The persistence of inflation above target levels continues to present challenges for households, despite the recent softening. Meanwhile, sterling edged higher against the U.S. dollar following the release of the data, as investors interpreted the figures as reducing the likelihood of a near-term rate cut.
With inflation gradually declining but still elevated, the BoE faces a delicate balancing act. Markets are now watching closely for signals on whether the central bank will pivot toward rate cuts later this year, or remain cautious until inflation shows more definitive signs of control.
