Inflation in the United Kingdom slowed in January, increasing the likelihood that policymakers at the Bank of England will implement an interest rate cut at their next meeting in March.
Data released on Wednesday by the Office for National Statistics showed the Consumer Price Index (CPI) rose by 3.0% year-on-year in January, down from 3.4% in December.
The decline in inflation suggests the Bank of England may begin reducing interest rates sooner than previously anticipated.
Joe Nellis, an economic advisor at MHA, stated, "Although the recent improvement in inflation is largely due to fading energy effects, weaker goods prices, and normalized supply chains, it is also a result of cautious consumer demand."
"This gives the Monetary Policy Committee a stronger case for a rate cut at its next meeting on March 19th."
Throughout 2025, UK inflation remained persistently high, significantly above the Bank of England's 2% target, driven by elevated services and energy prices and a substantial rise in business costs.
However, price increases are projected to slow rapidly in 2026. The central bank forecasts that inflation will average 2.5% for the full year and is expected to fall to 2% in April, following a reduction in household energy bills announced in the government's November budget. The bank also lowered its economic growth forecast for the year and raised its unemployment rate prediction.
Prior to the release of the January inflation data, the UK unemployment rate for the fourth quarter of 2025 had climbed to its highest level in nearly five years, while wage growth continued to slow, providing further justification for the central bank to consider lowering rates.
In addition to weakness in the labour market, economic activity in the UK has also been sluggish. The country's centre-left government, after 18 months in office, continues to struggle to revitalize the economy following more than a decade of stagnation. Gross Domestic Product (GDP) grew by 1.3% in 2025, and economists anticipate growth will slow further this year.
Consumers remain cautious. Despite a better-than-expected budget outcome in November, persistent economic and political uncertainty has made households reluctant to increase spending.
Nevertheless, the path for monetary policy remains divided. Officials are caught between deteriorating economic conditions and concerns about persistent inflationary pressures.
In early February, the Bank of England held its key interest rate steady at 3.75%. The vote was very close, with five committee members voting to hold rates and four voting for a cut.
Thomas Pugh of RSM UK noted that the central bank has set a high bar for its inflation forecasts, and inflation persistence in key sectors like services has been stronger than expected. This economist suggests that while a rate cut in the spring is likely, followed by another possible cut in the summer, there is a risk that a third rate cut this year may not materialize.
"Any sign of a rebound in inflation could disrupt plans for subsequent additional rate cuts."
Comments