Inflation fall eases home buyers' fears

Britain's inflation rate fell back below the government's target in February, according to official figures published yesterday, quelling fears that homeowners could face an early rise in mortgage costs.

Since inflation unexpectedly rose in January, speculation has been growing that the Bank of England would raise rates to choke off price rises. But the office for national statistics said annual inflation in February was 2.2% on the RPIX measure, which excludes mortgage interest repayments, comfortably below the 2.5% target set by the chancellor. The all-items RPI measure fell to 1%.

Analysts said yesterday's figures would make it harder for hawks on the Bank of England's monetary policy committee to argue for an increase in borrowing costs on April 4, and reinforced the argument of Sir Eddie George, the Bank's governor, that the City is betting on unrealistically high rates.

Sir Eddie used a speech to the Asian Business Association in London last night to reiterate that the MPC may be able to avoid pushing up rates in the near future.

After warning that borrowing costs would have to rise if the international economy recovered and consumer demand remained strong, he said: "It's quite possible, even quite likely, that the necessary moderation of consumer demand - and I emphasise the word moderation - will come about of its own accord, given the gradual increase in unemployment we are currently seeing, and the build-up of household debt. And, provided it does not happen too abruptly, that would be the best possible outcome."

Yesterday's figures showed the main downward pressure came from clothing and footwear, which were 5.3% cheaper than the same month last year. The cost of women's clothes fell 10%.

The price of leisure goods also helped to pull inflation down in February, according to the ONS, with CDs, tapes and toys cheaper than a year ago. Petrol prices fell by 9%.

The service sector still appeared able to raise prices. Restaurant meals were up 4%, household services such as phone bills 4.1% and foreign holidays 7%.

Britain's inflation is the lowest in the European Union, according to the harmonised index of consumer prices for February, also published by the ONS yesterday.

· The Federal Reserve yesterday left US interest rates unchanged at 1.75% but opened the door to rises later by signalling it no longer thinks economic slowdown is a greater risk than inflation.

The Fed's open markets committee said: "The information that has become available since the last meeting of the committee indicates that the economy, bolstered by a marked swing in inventory investment, is expanding at a significant pace."