Inflation in the United Kingdom fell for the second month running in March. This was largely as a result of lower prices at the pump, according to official figures released on Wednesday.
March's lower inflation print is likely to pile pressure on the Bank of England to cut interest rates next month.
The Office for National Statistics said consumer prices rose by 2.6% in the year to March, down from 2.8% the previous month. The decline was bigger than anticipated, with most economists predicting a more modest decline to 2.7%.
However, inflation remains above the Bank of England’s target of 2% and is set to rise far higher in April due to a confluence of factors, including higher domestic energy bills.
Still, most economists think the bank can lower its main interest rate from 4.50%. This is because the peak in inflation is likely to be lower than previously thought, not least because US President Donald Trump’s tariff policies are likely to depress global growth and hence prices. One impact of Trump’s tariff plans has been lower oil prices, which will have a downward effect on inflation.
“An interest rate cut in May looks increasingly nailed on, and the path to more easing in the second half of the year is getting clearer,” Luke Bartholomew, deputy chief economist at asset management firm Aberdeen, said.
Could the Bank of England cut rates again this year?
Inflation is way down from levels seen a couple of years ago, partly because central banks have dramatically increased borrowing costs from near zero during the coronavirus pandemic. Prices then began to shoot up, first as a result of supply chain issues and later because of Russia's full-scale invasion of Ukraine, which pushed energy costs higher.
As inflation rates have declined from multidecade highs, central banks, including the US Federal Reserve have started cutting interest rates, though few, if any, economists think that rates will fall back to the super-low levels that persisted in the years after the global financial crisis of 2008-2009 and during the pandemic.
However, inflation still remaining above its 2% ideal threshold could prompt the Bank of England to rethink its further rate cuts.
“Inflation remains stubbornly above the 2% target. With wages rising at about 6%, real incomes are growing, but the prospect of inflation ramping up continues to haunt the market. Traders are pricing in three or possibly four cuts by the end of the year, but stubborn inflation throws this into doubt," Nick Saunders, CEO of stock trading platform Webull UK, said.
"The big unknown is the effect of a tariff war - this could actually help get prices in the UK down if European and Asian exporters seek new markets while loosening the UK job market," he added.
Danni Hewson, head of financial analysis at AJ Bell, said: “At 2.6% inflation is ahead of the Bank’s 2% target but it’s likely to be sufficiently low to give rate setters the green light to keep cutting the base rate, with markets currently pricing in an 85% chance of a quarter percentage point cut at the next meeting."
She pointed out that the bigger question is, where interest rates might go next.
“We know increased household costs will colour next month’s data, but Donald Trump’s tariff policy could potentially result in a dumping of lower priced goods on UK shores. Concerns about global growth may keep the oil price subdued, though homegrown issues like increased labour costs could result in a significant fall in employment and lower wage growth."
The Bank of England has lowered its main rate from a 16-year high of 5.25% by a quarter of a percentage on three occasions since last August, most recently in February.
