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UK Inflation Falls Below BOE Target

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UK Inflation Falls Below BOE Target

UK inflation fell below the Bank of England’s target for the first time since 2009, further validating the central bank’s decision to hold off on raising interest rates.

Consumer inflation rose at an annual rate of 1.9 percent in January, official data from the Office for National Statistics showed today. Economists forecast inflation to remain steady at the BOE’s target of 2 percent. The so-called core measure, which excludes volatile products such as food and energy, slowed from 1.9 percent to 1.6 percent annually.

Price movements for recreational goods, furniture, alcohol and tobacco were the biggest factors behind the unexpected drop. Higher prices for miscellaneous goods and services partially offset these downward contributions. However, the sectors that have contributed the most to the actual rate of inflation – housing, water, electricity and gas – didn’t change much from the previous month, the ONS reported.

Tuesday’s figures reinforce the BOE’s latest decision to maintain record-low interest rates. The central bank has been criticized by the markets for maintaining an accommodative stance toward monetary policy in the face of overwhelming evidence showing rapid recovery in the UK economy. The BOE, having failed to manage rate expectations over the past half year, updated its rate guidance last week. The current pace of recovery, the bank says, could pave the way for higher interest rates by the second quarter of 2015.

The UK economy could expand 3.4 percent this year, according to a revised estimate from the BOE. Inflation, meanwhile, is expected to remain soft for several months. According to its latest forecast, the BOE believes inflation could dip to around 1.7 percent by March.

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