Small fall in inflation 'on track', says Bank of England governor

The Bank of England governor, Andrew Bailey, last night shrugged off a smaller than expected drop in inflation last month, saying he expects a sharp fall towards the government's 2% target next month.

- Larry Elliott, Richard Partington

Speaking in Washington after news that the government's preferred measure of the cost of living had eased to 3.2% in March, Bailey said the path of inflation was broadly in line with what Threadneedle Street had predicted in its quarterly health check on the economy.

Financial markets had predicted a bigger drop in the annual rate to 3.1% and saw the latest data on price pressures as putting back the timing of interest rate cuts.

Bailey said: "We are pretty much on track with where we thought we would be a bit under in February and a bit over in the latest figures. Next month will see quite a strong drop." While the UK was experiencing strong disinflation - a drop in the inflation rate - the governor said the fall was unbalanced. He said that April is likely to see household energy bills 25% lower than a year earlier, but service sector inflation is running at 6%. Decisions on interest rates would be influenced by service sector inflation, earnings growth and the state of the labour market, he said.