Inflation Report: Cost of Living Falls in March, But BoE Leaves Interest Rates

The cost of living in the UK fell slightly in March, with inflation dropping back by 0.1%.

The Bank of England's quarterly Inflation Report shows that inflation fell to 1.6% in March, attributed to lower petrol prices in spring 2013.

The bank's governor Mark Carney said the rate of inflation is about 1% lower than he had expected.

However, the bank expects inflation to move closer to its target rate of 2% in coming months, as the decrease in petrol prices drops out of the annual comparison.

The bank maintained its projection over 2014 GDP growth (3.4%) but upgraded its prediction for 2015 to 2.9% from 2.7%.

Carney was boosted by news this morning that UK unemployment has hit a five-year low of 6.8%. In further good news for the jobs market, the bank has predicted that within two years, the rate will fall to 5.9%.

Office of National Statistics figures, also released today, showed that average weekly earnings are now growing more quickly than inflation for the first time in six years.

Despite the positive figures on jobs and growth, Carney was keen to dampen speculation that the economy has fully recovered, saying it is only now beginning to return to normal.

He said: "Securing the recovery is like making it through the qualifying rounds of the World Cup. That's a major achievement but the actual tournament is only just about to begin."

Carney said that productivity and real wage growth are both yet to pick up and that productivity is only expected to return to pre-crisis levels in three years.

Carney expects to increase interest rates from their current historical low rate of 0.5% before the general election in quarter two of 2015.

Despite fears over a housing bubble emerging, there will be no immediate rate hike with the bank confident that the other tools at its disposal are effective.

Carney said: "We do have a range of other tools. Some of which we have a very high confidence about their effectiveness. What we don't have at the Financial Policy Committee (FPC) is an ability to control all aspects of the housing market, we can't perform miracles. The FPC cannot build a single house. The FPC will not be targeting house prices. What the FPC can do is reduce risks from the housing market."

He said that interest rates remain the "last line of defence". Any rise, said Carney, would be "gradual and limited".

Carney is concerned over the amount of slack remaining in the economy, which the bank says is somewhere between 1% and 1.5% of GDP (the same as its February estimate).

The pound rose 0.3 cents against the dollar overnight on Carney's suggestion that interest rates will be increased before the general election.