UK inflation hits 2.5-year low, Bank of England considers interest rate cut

London: In the UK, inflation fell to its lowest level in two and a half years in March due to lower food prices, according to official figures released on Wednesday. This could lead to a possible interest rate cut soon.

Consumer prices rose by 3.2 per cent in the year to March, down from 3.4 per cent in February, as reported by the Office for National Statistics. This is the lowest level since September 2021.

The decline in the annual rate was slightly less than expected. Economists had predicted a rate of 3.1 per cent for the month. Although inflation is still above the Bank of England's target of 2 per cent, the trend seems to be moving in a clear direction.

Inflation reached a peak above 11 per cent towards the end of 2022 following Russia's invasion of Ukraine, which resulted in significant increases in energy costs.

This decrease means that the UK's inflation rate is now lower than the US's for the first time in two years.

In March, inflation in the US rose to 3.5 per cent. Inflation is expected to decrease further in April, possibly falling below 2 per cent, due to notably lower domestic energy bills. Economists believe this could lead the Bank of England to consider lowering interest rates from the current 16-year high of 5.25 per cent in the coming months.

However, some of the nine policymakers have cautioned that the battle against inflation is not over, as they anticipate prices to rise again in the latter half of the year.

"With a further significant drop expected next month, inflation should soon return to target, and the pressure to cut interest rates will increase," said Simon Pittaway, senior economist at the Resolution Foundation think tank.

The Bank of England, alongside the US Fed and other central banks worldwide, raised interest rates significantly in late 2021 from near zero to counter rising prices driven first by supply chain issues during the pandemic and later by the Ukraine conflict.

Higher interest rates, which make borrowing more expensive and thus restrain spending, have contributed to lowering inflation globally.

The UK's governing Conservative Party is hoping that lower inflation and decreasing interest rates might create a positive sentiment ahead of the general election, which must take place by January 2025.

Opinion polls indicate that the main opposition Labour Party is well ahead and on track for a significant victory over the Conservatives, who have been in power since 2010.

The UK's annual inflation rate decreased less than expected in March to 3.2 per cent, complicating the timing of a potential first Bank of England interest rate cut.

Data from the Office for National Statistics (ONS) reveals that inflation continued its decline from 3.4 per cent in February, largely due to slower growth in food prices compared to a year earlier. City economists and the Bank had anticipated a slightly larger drop to 3.1 per cent.

The last time inflation, as measured by the consumer prices index, was lower was in September 2021 when it stood at 3.1 per cent. A decrease in the inflation rate does not mean prices are falling; rather, they are increasing at a slower pace.

The ONS stated that the cooling of inflation in food and drink prices was the main contributor to this decline. Prices of certain bakery products, including chocolate biscuits and crumpets, fell between February and March but rose compared to the same period last year.

Overall, food prices rose by 4 per cent, down from a peak of 19.1 per cent in March 2023 when food and drink inflation reached its highest level since the late 1970s.

The Bank is contemplating the timing of a potential first interest rate cut after raising borrowing costs to their highest level since the 2008 financial crisis in response to soaring inflation. The measure for the annual increase in living costs hit a 41-year high of 11.1 per cent in October 2022 following the Covid pandemic and Russia’s invasion of Ukraine.

Core inflation, which excludes energy, food, and tobacco prices and is closely monitored by the Bank, also slowed to 4.2 per cent from 4.5 per cent in February, although it was slightly higher than forecast by City economists.

Services inflation, another closely watched metric by the Bank, eased slightly to 6 per cent from 6.1 per cent a month earlier, according to the ONS.

Economists are anticipating a further decline in inflation in April, with the potential to fall below the Bank’s 2 per cent target following a significant drop in household gas and electricity bills to the lowest level in two years.

Rachel Reeves, the shadow chancellor, commented: “Conservative ministers will be making the rounds today to tell the British people that they are experiencing the best of times. However, after 14 years of economic challenges under the Conservatives, working people are still struggling.

“Prices in stores remain high, monthly mortgage payments are increasing, and inflation is still above the Bank of England’s target.”

Chancellor Jeremy Hunt stated: “The plan is working: inflation is dropping faster than expected, down from over 11 per cent to 3.2 per cent, the lowest level in nearly two and a half years, which is helping people’s finances go further.”

Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales, remarked: “A significant decline in inflation is expected for April, as lower energy bills following the reduction in Ofgem’s energy price cap will almost certainly bring the headline rate below the Bank of England’s 2 per cent target.

“While this decrease in inflation for March may not be enough to prompt an interest rate cut next month, it may persuade more policymakers to vote in favor of loosening policy, providing a clear indication that rate cuts are on the horizon.”