U.K. Inflation Slows as IMF Sees Need for More Stimulus

U.K. inflation slowed more than economists forecast in April, cooling to a level that relieves Bank of England Governor Mervyn King of the task of writing a letter to the government.

Consumer prices rose 3 percent from a year earlier, down from 3.5 percent in March, the Office for National Statistics said today in London. The median forecast of 30 economists in a Bloomberg News survey was 3.1 percent. The rate is within the government’s boundaries for the first time since February 2010.

The inflation slowdown came as the International Monetary Fund said the Bank of England should add to stimulus for the economy. While the central bank halted its so-called quantitative-easing program this month, King left the door open to more bond purchases at a press conference last week as the central bank lowered growth forecasts.

“These figures give the Monetary Policy Committee slightly more leeway to undertake more QE to cushion the U.K. economy from the euro-zone turmoil,” said Vicky Redwood, an economist at Capital Economics Ltd. in London. “We expect core price pressures to ease further in response to contracting output and weak pay growth.”

The pound extended its decline against the dollar after the data was published and the IMF said Britain requires further monetary easing. Sterling dropped as much as 0.5 percent to $1.5764 and was trading at $1.5785 as of 10:52 a.m. in London. The 10-year gilt yield rose 2 basis points to 1.86 percent.

IMF Comments

“There are more tools that can be used from a monetary policy point of view,” IMF Managing Director Christine Lagarde said in London after the fund published its annual review of the U.K. “It has quantitative easing measures available that could be resumed. We also believe that there is room in terms of interest rates that could be used as well.”

The Bank of England held its bond-purchase target at 325 billion pounds ($512 billion) this month and kept its key interest rate at a record-low 0.5 percent. Minutes of the meeting, showing how officials voted, will be released tomorrow.

From the previous month, consumer prices rose 0.6 percent in April, the statistics office said. The decline in the annual rate was due to the timing of the Easter holiday and prices changes in the transport, alcohol and clothing categories.

Core inflation, which excludes alcohol, food, tobacco and energy prices, slowed to 2.1 percent from 2.5 percent. Retail- price inflation, a measure used in wage negotiations, eased to 3.5 percent from 3.6 percent. The retail-price index excluding mortgage-interest payments showed an annual gain of 3.5 percent.

BOE Target

While inflation is slowing, it has been above the central bank’s 2 percent goal for 29 months, and King is obliged to write quarterly to the government when the rate differs from the target by more than 1 percentage point. He said last week that while the rate will fall more slowly to 2 percent than previously forecast, slack in the economy would put downward pressure on price growth.

Separately, data showed Britain had an underlying budget deficit of 13.8 billion pounds in April, the first month of the fiscal year, compared with 9.1 billion pounds a year earlier. The figure excludes the transfer of Royal Mail Group Ltd. pension assets to the public sector.

Prime Minister David Cameron has said there can be no retreat from his deficit-reduction plans even as the economy struggles to grow. While the Organisation for Economic Cooperation and Development backed the fiscal squeeze today, saying that it’s “appropriate despite disappointing economic growth,” the IMF said the government should consider greater fiscal stimulus if monetary policy fails to revive growth.

U.K. Outlook

The central bank’s Inflation Report published last week shows annual consumer-price gains slowing to 2 percent by about the middle of next year, and reaching about 1.6 percent in two years. The bank lowered its economic outlook because of pressure from the euro-area debt crisis.

The OECD said today that the debt turmoil risks spiraling and seriously damaging the world economy, in comments that come a day before European Union leaders gather in Brussels to discuss how to revive growth and grapple with a political impasse in Greece.

“The risk is increasing of a vicious circle, involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth,” OECD Chief Economist Pier Carlo Padoan said.

An index of euro-area consumer confidence probably fell to a four-month low in May, economists said before a report due to be published later today.

Japan Downgrade

Earlier, Japan reported that foreign investments and assets grew to the second-highest level on record as companies used the high yen to make acquisitions abroad, a trend that may help them cope with stagnant demand at home. Investments abroad grew 3.3 percent to 582 trillion yen ($7.3 trillion) in 2011, rising for the third year.

Still, Fitch cut the nation’s credit rating one step to A+ with a negative outlook, citing its “leisurely” efforts to tackle the world’s biggest public debt burden. Japan’s government said in January that it will probably miss its goal of balancing the budget by fiscal 2020 even with a proposed doubling of the sales tax, yet to be approved by lawmakers.

In the U.S., sales of previously owned homes probably rebounded in April, according to an economists’ survey. Purchases advanced 2.9 percent to a 4.61 million annual rate, the National Association of Realtors today in Washington will probably say. Purchases dropped 2.6 percent to a 4.48 million annual rate in March.

To contact the reporters on this story: Jennifer Ryan in London at jryan13@bloomberg.net; Scott Hamilton in London at shamilton8@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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