UK inflation experienced a sharper-than-expected decline to 2.8 percent in February, providing a boost to Chancellor Rachel Reeves as she prepared for a crucial Spring Statement. The Office for National Statistics (ONS) reported on Wednesday that the annual increase in consumer prices fell below the 2.9 percent forecast by economists surveyed by Reuters, and was a decrease from the 3 percent recorded in January.
The reduction was largely attributed to a decline in clothing prices, which saw a 0.6 percent drop over the 12 months leading up to February. Services inflation, which serves as an essential indicator of underlying price pressures for rate setters, remained steady at 5 percent in February, contrary to economists’ predictions of a decrease to 4.9 percent.
Sustained price pressures have influenced the Bank of England’s decision to adopt a “gradual” strategy for reducing interest rates, despite sluggish growth. Last week, the rates were maintained at 4.5 percent. Joe Nellis, an economic adviser at MHA, an accountancy firm, noted that while the reduction in headline inflation was a welcome development for the government, it was unlikely to alter the BoE’s gradual approach to rate cuts.
Following the ONS data release, the pound decreased by 0.3 percent to $1.290, and the yield on the rate-sensitive two-year gilt dropped by 0.04 percentage points to 4.26 percent. Traders increased their expectations that the BoE would implement two additional quarter-point rate cuts this year, with probabilities rising from 60 percent to 75 percent, as indicated by the swaps market.
These inflation figures emerged as Reeves prepared to announce over £10 billion in spending cuts later in the day. This move aims to address a deficit in public finances, exacerbated by weak growth and rising borrowing costs.
