UK inflation unexpectedly sticks at 13-month low before BoE rate decision

By David Milliken and Suban Abdulla

LONDON, June 17 (Reuters) - British inflation held at 2.8% in May, unchanged from April's 13-month low and below forecasts from both economists and the Bank of England, official figures showed on Wednesday, a day before the central bank's next interest rate decision.

Sterling weakened a little against the U.S. dollar after the data, British government bond yields fell to a new two-month low and investors slightly trimmed their expectations for a rate increase later this year.

Economists polled by Reuters had forecast a rise to 3.0% for May, and the BoE in April predicted an increase to 3.3% as the U.S.-Israeli war on Iran kept British inflation almost a percentage point higher than the central bank had forecast in February.

Lower prices than in April for meat, vegetables, dairy products and domestic heating oil helped offset a jump in airfares and petrol prices, the Office for National Statistics said on Wednesday.

UK INFLATION HAS LONG BEEN ABOVE TARGET

Inflation has been above the BoE's 2% target for most of the past five years. In April, the BoE said it was likely to rise above 3.5% by the end of the year and potentially exceed 6% early next year under the most adverse of three scenarios.

However, financial markets this week have drawn comfort from an interim agreement between the U.S. and Iran which promises to reopen the Strait of Hormuz, a major corridor for oil exports, and is due to be signed in Switzerland on Friday.

"Today's data strengthens the case for a continued cautious approach from the Bank of England," Yael Selfin, chief economist at KPMG, said.

"Underlying inflationary pressures have yet to show clear signs of strengthening, which is likely to underpin a majority decision within the Monetary Policy Committee to hold interest rates at Thursday's meeting," she said.

Economists polled by Reuters expect the BoE's Monetary Policy Committee to vote 7-2 to keep rates on hold at 3.75%.

While Governor Andrew Bailey says the BoE has time to wait to assess the impact of the conflict, some policymakers worry businesses will use it to raise prices more broadly, or that it could dent households' confidence in the BoE inflation target.

A quarterly BoE survey released last week showed the public's expectations for inflation in five years' time were the highest since the series began in 2009 at 3.9%.

VOLATILE AIRFARES

Britain has been more affected than most Western countries by the conflict due to its reliance on imported natural gas, and manufacturers reported an 8.7% annual rise in their raw material costs for May, the biggest since February 2023.

"A chunk of inflation is locked in the system now," Rob Wood, chief economist at Pantheon Macroeconomics, said. He now predicts inflation will peak at 3.4% in November, down from his previous forecast of 3.6% before the Iran deal, and he no longer expects the BoE to raise rates this year.

Services price inflation - which the BoE views as a guide to underlying price pressures - rose to 3.7% in May from 3.2% in April, in line with economists' forecasts.

The rise in services inflation partly reflected a 10.3% monthly jump in airfares, which are volatile. High Easter prices were not captured in April 2026 data but were in 2025.

Core inflation, which excludes food, energy, alcohol and tobacco prices, rose slightly less than expected to 2.6% from 2.5%.

(Reporting by David Milliken and Suban Abdulla; Editing by Alison Williams and Hugh Lawson)