INFLATION fell sharply last month to its lowest since November, reducing the chances of an imminent rise in interest rates.

Underlying inflation fell from the 2.3 per cent recorded in April to 1.8 per cent in May, figures from the Office for National Statistics revealed.

The figure is the lowest since November last year, and matches the lowest since the ONS started monitoring the series in 1975. It is the sharpest month on month fall since October 1993.

The data also surprised the City, which had been predicting a smaller fall.

Inflation has now been below the 2.5 per cent target for all but two months during the last three years.

Headline inflation, which includes mortgage interest payments also fell by more than expected, to 1.1 per cent, from 1.5 per cent in April.

Economists said the fall made the likelihood of an interest rate rise next month recede, although analysts are still expecting a rise to come in the next few months.

Philip Shaw, economist at Investec, said: "Overall, the news of a sharp drop in inflation puts the question of a July rate rise into doubt."

However he said the decision would also depend on retail sales figures tomorrow, which would prove "critical"