By Andy Bruce and Sarah Young
LONDON (Reuters) - British inflation fell more than expected in July and surging house price growth slowed in June, making it less likely the Bank of England will raise interest rates this year.
Inflation dropped to 1.6 percent in July from June's five-month high of 1.9 percent, according to official data that sent sterling tumbling to a four-month low against the dollar.
Last week, the BoE curbed expectations rates would rise in 2014 by slashing forecasts for wage growth. Any remaining pressure to raise record-low rates this year receded further after Tuesday's data.
"We view today's data as consistent with the mood music playing at present, which is that for now, a late-2014 increase in Bank Rate appears to be off the cards," said Victoria Clarke, economist at Investec.
Economists had expected consumer price inflation would tick down to 1.8 percent. The first annual fall in factory-gate prices since 2009 underlined the weakness in domestic inflation pressures.
Still, the outlook for inflation depends on estimates about the amount of slack left in Britain's economy, something that divides members of the Bank's Monetary Policy Committee.
Minutes for the MPC's August meeting are due on Wednesday and will be scrutinised for explicit signs of division, but most economists do not yet expect to see the first dissenting vote for a rate hike since July 2011.
Until last December, annual inflation had exceeded the Bank's 2 percent target every month since December 2009, eroding the spending power of households and making the fall in living standards a political issue before next year's election.
The fall in inflation this year has helped the Bank of England to hold off on raising interest rates, despite Britain's surprisingly strong economic recovery.
Wage growth has also been extremely weak, although BoE Governor Mark Carney said in a weekend newspaper interview that he would not necessarily wait for wages to rise faster than inflation before raising interest rates.
Compared with the previous month, the consumer price index in July was down 0.3 percent, the ONS said. The biggest downward pressure on inflation in July came from lower clothing and footwear prices, reflecting seasonal discounting which started slightly later this year than in 2013.
HOUSING MARKET COOLING?
Rapid house-price inflation - described as the biggest domestic threat to Britain's financial stability by BoE Governor Mark Carney - also eased slightly in June, according to separate data from the Office for National Statistics.
Annual house prices grew 10.2 percent in June, down from 10.4 percent in May. Nonetheless, for the second quarter as a whole, the annual increase of 10.2 percent was the biggest since the third quarter of 2007.
Growth in property prices continued to be led by London, where they rose 19.3 percent higher than a year earlier, down slightly from May's 20.1 percent annual rise.
"With recent data from Rightmove and RICS pointing to a subsequent slowdown through the summer, we expect to see house- price inflation slow back to single-digit rates over the second half of the year," said Martin Beck, senior economic adviser to accountants Ernst & Young.
Asking prices for houses in Britain have fallen at the sharpest pace on record for the month of August, led by a drop in London, according to property website Rightmove on Monday.
Data also released by the ONS on Tuesday showed that factory-gate prices fell by 0.1 percent in annual terms, the first drop since October 2009 and slightly below economists' predictions for no change.
"The weakness in producer prices highlights the near-term disinflationary effects from the rising pound," said Michael Saunders, chief UK economist at Citi.
(Editing by Larry King)