Traders have increased bets on a Bank of England interest rate cut in March after UK inflation fell to its lowest level in 10 months.
Markets are now pricing in an 84% chance that the Bank will reduce rates from 3.75% to 3.5% next month, after official figures showed a sharp slowdown in price pressures.
The Office for National Statistics reported that the consumer prices index dropped from 3.4% in December to 3.0% in January. This marks the lowest inflation reading since March last year, when inflation stood at 2.6%.
Yael Selfin, chief economist at KPMG UK, said the decline “paves the path” for the Bank’s Monetary Policy Committee to cut rates at its next meeting.
“Today’s inflation data will likely prompt the Bank of England to lower interest rates next month,” she said, adding that policymakers would welcome the broad-based easing across both headline and underlying measures.
However, some economists believe the Bank may wait until April before easing borrowing costs. Ellie Henderson at Investec cautioned that inflation remains above the Bank’s 2% target.
“Inflation at 3% is still some way above the target, meaning caution should prevail when it comes to loosening policy further,” she said, maintaining Investec’s view that the next cut may not come until April.
The Bank of England expects inflation to return to its 2% target around April, keeping markets closely focused on upcoming economic data ahead of the March decision.
