Producer Prices in UK failed to meet market estimates and rose at the slowest pace in half a year, signaling that inflation pressures might be easing in the country, despite the fact that inflation continue to hover above the government’s upper limit of 3.0 percent.

PPI input dropped by 0.5 percent during August, compared with the previous -1.0%, while on the yearly basis, the index retreated from the previous 10.8 percent to record a rise of 8.1 percent.

Moreover, the PPI Output came was flat during August, compared with the previous and the expected 0.1 percent rise; on the year, the index showed an increase of 4.7%, compared with the previous 5.0 percent. The drop in raw materials signals cheaper imports due to higher sterling, where the dollar depreciated 2.4 percent during August against both the Euro and the Pound.

Furthermore, the PPI output-Core rose as expected on a monthly and yearly basis by 0.1% and 4.6 percent respectively, compared with the prior 0.2% and 4.7 percent.

During yesterday’s Rate Decision the BoE preserved the benchmark interest rate at record low of 0.50 percent, in addition to preserving the APF program at £200.0 billion, despite the fact that inflation remains settled above the upper-limit of 3.0 percent, at 3.1 percent, as reported during July.

MPC member, Andrew Sentance, failed for the third consecutive meeting to persuade members with the risk of elevated inflation levels, as he called for a 25 basis point hike in rates during the past three meetings in order to control rising inflation levels. Bank regulatory committee responded by, weak economic conditions in the country will pressure inflation to decline, the voting for this meeting will be released in two weeks as markets expect Sentance to have remained alone in his fight against inflation.

The latest edition of UK’s inflation report assured that the British economy continues on walking towards full recovery, where the economy expanded during the first six months of this year close to the historic average rate, but still below the peak that was witnessed before the crisis. Bank of England expects that inflation levels will remain elevated and above 2.0 percent throughout the upcoming year.

The bank stated that inflation will remain above 2.0 percent which is considered the desired rate by the bank for inflation in the country, meanwhile, the bank noted that rising prices are affected by three factors which is the decline that was witnessed in the value of the currency, as it dropped by nearly 25.0 percent, along with rising oil prices and the government action’s of raising VAT to 17.5 percent and still to rise further to 20.0 percent in January 2011.

The BoE lowered its growth estimate for this year, where the bank expects the economy to grow by nearly 3.0 percent, compared with the previous estimates of 3.6 percent, as for inflation, the bank expects that inflation will reach 1.5 percent by the year 2012, which is below the desired levels that is set by the bank, accordingly, supporting expectations for a tighter monetary policy by the bank.

The bank expects to raise interest rate to 1.0 percent by the fourth quarter of 2011 and 1.9 percent by the end of 2012 along with expecting a decline in inflation levels to hover near 1.5 percent during 2012.

Bank of England assured that commercial activities in the country are disappointing and despite the big slump in the value of the pound over the past period, UK failed to reduce its budget deficit. Banks in Britain still face challenges especially tight credit conditions that hammer small and medium size banks from obtaining the necessary funding to expand their investments.

Saving rates increased among households and companies during the crisis, where uncertainty increased and shortened credit while household spending decreased by 5.0 percent during the recession. Investment spending flourished during the first quarter of 2010 while capital spending remained below the peak that was recorded before the crisis began.

Recent data signal the conditions in various sectors are cooling, especially in the services and manufacturing sectors, accordingly, putting more constrains on economic recovery. Inflation will remain elevated during this year, which could stall the recovery, as witnessed in growth forecasts for 2010.