Price rises in the U.K. eased more than anticipated in February, official figures showed Wednesday, raising expectations that with the cost-of-living crisis abating, the Bank of England may start cutting interest rates in the next few months.
The Office for National Statistics said inflation, as measured by the consumer price index, fell to 3.4%, its lowest level since September 2021, from 4% in January. The agency said easing food price increases were largely behind the fall.
The decrease was bigger than anticipated. Analysts had expected a decline to 3.6%.
Inflation is still running higher than the Bank of England’s target of 2% but the direction of the move appears clear. Inflation hit a high above 11% at the end of 2022 in the wake of Russia’s invasion of Ukraine, which led to sharp increases in energy costs.
The bigger-than-anticipated decline comes a day before the nine rate-setters at the bank announce their latest interest rate decision. The view in financial markets is that they will keep the main interest rate at a 16-year high of 5.25%.
The meeting minutes will be assessed to see how much thought policymakers are giving to cutting interest rates, which should feed through to lower mortgage rates.
“Moderating inflation may encourage the bank to strengthen the signal for a first rate cut in the second quarter,” said Kallum Pickering, senior economist at Berenberg Bank.
The Bank of England, like the U.S. Fed and other central banks around the world, raised interest rates aggressively in late 2021 from near zero to counter price rises first stoked by supply chain issues during the coronavirus pandemic and then by Russia’s invasion of Ukraine, which pushed up food and energy costs.
Higher interest rates — which cool the economy by making it more expensive to borrow, thereby bearing down on spending — have contributed to bringing down inflation worldwide.
Britain’s governing Conservative Party hopes that lower inflation and falling interest rates may trigger a feelgood factor ahead of a general election which has to take place by January 2025. Opinion polls show the main opposition Labour Party way ahead and headed for a big victory over the Conservatives, who have been in power since 2010.
Most speculation is that Prime Minister Rishi Sunak will call an election in the fall, when the economic backdrop is likely to be more benign than it currently is.
Treasury chief Jeremy Hunt Chancellor Jeremy Hunt will be hoping that the fight against high inflation is being won and that the bank could soon cut rates.
“What I’m really saying is that as inflation gets closer to its target, that opens the door for the Bank of England to consider bringing down interest rates, that brings down mortgage rates, that makes a very big difference,” he said.
Labour’s economy spokesperson, Rachel Reeves, said “prices are still high” despite the latest fall in the rate of inflation.
“After 14 years of chaos and uncertainty under the Conservatives, working people are worse off,” she said. “Prices are still high, the tax burden is the highest it has been in 70 years and mortgage payments are going up.”