Inflation falls to a near one-year low, will the Bank of England officially open the door to rate cuts in March?

Notice that UK inflation has fallen to its lowest level since March 2025, providing support for a rate cut by the Bank of England at its meeting next month. The UK Office for National Statistics said on Wednesday that the Consumer Price Index (CPI) rose by 3% year-on-year in January, lower than the previous month's 3.4% - last month's data was temporarily pushed up by the volatile components of inflation. This data matches economists' expectations but is slightly higher than the Bank of England's previous forecast of 2.9%. A decrease in petrol prices is the main driver of the slowdown in inflation. In addition, falling airfare and food prices have also put downward pressure on the CPI, offsetting the increase in hotel costs. The decline in airfare, petrol, and food prices has curbed inflation The latest data keeps the Bank of England on course for a rate cut in the spring. Currency market expectations remain stable, with two 25 basis point rate cuts expected this year, with the first potentially happening as early as next month. The pound fell slightly by 0.1% against the dollar, trading at 1.356. The bond market remains steady, with the 10-year bond yield at 4.38%. However, signs of lingering price pressures may give confidence to the three most hawkish members of the Monetary Policy Committee. As a closely watched indicator, the services inflation rate rose to 4.4%, higher than economists' expectations of 4.3% and significantly higher than the Bank of England's forecast of 4.1%. The core inflation rate rose to 3.1%, higher than the Bank's forecast of 2.9%, although this is the lowest level since 2021. James Smith, an advanced market economist at ING, warned that the high services inflation rate is due to underlying pressures rather than volatile factors such as airfares or holidays, suggesting that inflation may be more persistent. According to his calculations, the Bank's preferred "core services" inflation measure has risen from 4% to 4.3%. Sanjay Raja, Chief UK Economist at Deutsche Bank, said that the stickiness of services inflation is "worrying" and does indeed "raise concerns." Goods inflation offset the higher readings in services and core inflation, dropping significantly from 2.2% to 1.6%. The CPI data released on Wednesday is the last of its kind before Bank of England officials vote on rates at their meeting on March 19. The Bank of England expects that as the measures announced by Chancellor of the Exchequer Rishi Sunak in the November budget begin to affect living costs, the CPI will return to the target level of 2% in the spring. High UK services inflation rate In response to the data released by the ONS, Sunak said that reducing inflation remains "her top priority." A year ago, her budget raised a range of administrative costs, but these factors will be excluded from the CPI calculation in April this year. Zara Knox, Global Market Analyst at Morgan Asset Management, said that the UK has "finally turned a corner." She noted that data shows "significant overall inflation decline with widespread trends of slowing inflation in all industries," adding that rate cuts could be concentrated in the near term. Dovish members of the Monetary Policy Committee may be encouraged by the overall inflation data. Prior to this, another weak employment report showed a slowdown in wage growth and the unemployment rate reaching a five-year high. Economists Dan Hansen and Anna Andrade noted, "The drop in the inflation rate in January may signal the beginning of a rapid decline in inflation over the coming months, with the Bank of England's target likely to approach 2% indefinitely before April. The latest data supports our view that cooling cost pressures may be slow. However, with rising unemployment and declining wage growth, the Bank of England may further reduce rates to guard against downside risks. We anticipate rate cuts in March and June." There is broader evidence indicating that commodity inflation will continue to decline in the coming months, as the year-on-year growth rate of input producer prices has slowed from the revised 3.1% in December to 2.5%, and factory price inflation has decelerated from 0.5% to 0.2%. At the February meeting, the Bank of England decided to keep rates unchanged by a vote of 5-4, with this slim majority reflecting officials' diverging views on the timing and pace of rate cuts. Among the five dissenting voters against a rate cut are some who have previously hinted, including Governor Andrew Bailey and Catherine Mann, that they may change their stance if there is more evidence of inflation slowing. However, one of the more hawkish voices in the committee, Chief Economist Huw Pill, warned that rates are still "slightly too low," and said that rates should remain unchanged for a longer period.