Easing UK inflation keeps BOE on track for rate cuts later in 2024

BRITISH inflation slowed in February, keeping the Bank of England (BOE) on track to start cutting interest rates in the months ahead and offering some better economic news to Prime Minister Rishi Sunak before an election expected later this year.

Consumer prices rose by 3.4 per cent in annual terms after a 4 per cent increase in January, the weakest rate of inflation since September 2021, official data showed on Wednesday (Mar 20). A Reuters poll of economists – and the BOE’s own forecast published last month – had pointed to an annual rate of 3.5 per cent.

Food and prices at eateries were the biggest downward drags, offset by motor fuels, the Office for National Statistics said. Core inflation, which excludes energy, food and tobacco prices, also slowed, dropping to 4.5 per cent from 5.1 per cent in January. The Reuters poll had pointed to a reading of 4.6 per cent.

BOE governor Andrew Bailey and his colleagues are weighing when to start cutting rates from a 16-year high of 5.25 per cent, but a move at the central bank’s meeting on Thursday is unlikely. Its Monetary Policy Committee (MPC) is likely to leave interest rates on hold, as is the US Federal Reserve, which publishes its decision later on Wednesday.

Policymakers in London say they need to see further evidence that price pressures will fall back sustainably to the 2 per cent target before easing.

Ellie Henderson, an economist at Investec, said: “Today’s inflation numbers do not change our view… that the MPC is likely to convey the message that it has an eye on easing policy rates this year, but the hurdle to do so has not yet been overcome.”

Investors slightly increased bets on the BOE starting to cut rates. The market is close to fully pricing three quarter-point reductions by December, with the first move expected in August, though there is a more than 50 per cent chance that could come in June, according to swaps tied to policy-meeting dates. 

Sterling was little changed. The pound is the best-performing major currency against the US dollar this year on expectations that the BOE will hold rates higher for longer than other central banks. 

Services inflation, which the BOE watches closely, slowed to 6.1 per cent from 6.5 per cent in January – as the central bank expected.

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The latest reading brings the UK closer to the inflation levels prevailing in the US and euro area, where policymakers are preparing to ease off on the monetary tightening imposed to get prices under control after the pandemic.

Despite this, Britain still has the highest rate of headline inflation among the G7 advanced economies. British consumer prices have increased by more than 21 per cent since the end of 2020, a record surpassed only by Austria in Western Europe, according to comparable Eurostat figures.

Boost for Sunak?

The BOE has said underlying inflation pressures remain too persistent for it to cut interest rates now, although it has signalled that lower borrowing costs are likely later this year.

The BOE thinks inflation – which peaked above 11 per cent in October 2022 – will fall back to the central bank’s 2 per cent target in the coming months, before picking up again slightly.

The figures will also be welcomed by Sunak, whose standing has been hit by Britain’s cost-of-living squeeze. The prime minister has sought to take credit for more than halving inflation, although there has been scant sign of an opinion poll boost for his struggling Conservative Party, which lags the opposition Labour Party by around 20 points.

Chancellor of the Exchequer Jeremy Hunt said the latest fall in inflation could help the government with its goal of abolishing social security taxes altogether. But any moves would be done only if the government could avoid increasing borrowing or cutting funding for public services.

Earlier this month, Hunt cut the rate of social security contributions for the second time in less than four months. He also took the unusual step of commenting on what the data might mean for the BOE.

“As inflation gets closer to its target, that opens the door for the Bank of England to consider bringing down interest rates,” Hunt told reporters.

Sunak has said Britain’s economy is turning a corner, and he is urging voters to stick with his Conservative Party to see his plan through.

The Labour Party said prices were still high and that people were worse off after 14 years of Conservative government.