British inflation returns to target for the first time in almost three years in May

The recent drop in British inflation to its 2% target in May, the first time in nearly three years, is indeed notable. However, underlying price pressures remain, with services price inflation at 5.7%, slightly higher than the expected 5.5%.
This indicates that the Bank of England (BoE) is likely to maintain its current interest rates for a longer period despite the headline inflation improvement.

The fall in inflation from April’s 2.3% to May’s 2% was driven primarily by a reduction in regulated household energy bills, an effect expected to diminish later in the year. The BoE forecasts that inflation will rise again as this temporary effect fades. Consequently, while this drop is welcomed, it is insufficient for the BoE to start cutting interest rates immediately.

Most economists predict that the BoE might begin to cut rates from the current 5.25% in August, but financial markets suggest the first rate cut could occur in September or October. This cautious approach is due to the persistent medium-term inflation risks highlighted by the services price inflation data

Overall, while the return to the 2% inflation target is a positive development, the BoE’s focus on sustained inflation control suggests that interest rate cuts are not imminent.