Today's inflation data provides good news for the Bank of England's monetary policy committee meeting on Thursday and raises hopes of a first interest rate cut in coming months, economists said.
Money markets were quick to price in higher chances for at least three rate cuts by the end of the year, with growing confidence of a June cut from the MPC.
Between economists, there has been a big split of views on whether the committee will start cutting in June or wait until the third quarter, where meetings are scheduled for August and September.
The consumer price index reading today showed UK inflation softening to 3.4% in February from 4% the month before.
Optimism about a cut in June started to grow after jobs, wage and GDP data last week.
After today’s CPI figures, Deutsche Bank’s chief UK economist Sanjay Raja said the path of easing inflation back to the BoE’s 2% target seems to be on track so the first cut could come in the May or June meeting.
Like many economists, he sees headline CPI falling to around the 2% target in April, dragged lower by falling fuel bills as Ofgem cuts the energy price that month.
With comparisons with last year weighing further on CPI in May and June, and prices remaining broadly around the 2% mandate for much of the year past March, “this should allow the MPC to comfortably adjust the degree of restrictiveness in monetary policy from as early as Q2-24”, Raja said.
Henk Potts, market strategist at Barclays Private Bank, is another seeing the headline rate of inflation falling back below the Bank’s target as the year progresses, which he said “could pave the way for the start of the interest rate cutting cycle in June”.
Rob Wood, chief UK economist at Pantheon Macroeconomics, agreed that CPI inflation is likely to fall back to about 2% in April, also seeing it undershooting the target over the following six months.
He thinks these inflation readings over the coming months “will convince the MPC that monetary policy does not need to be quite as ‘restrictive’ as it is currently”,
But whether the first cut comes in June or August “looks like a toss-up”, said Wood.
Market analyst Katheleen Brooks at XTB said markets are taking this morning's CPI print "as a green light to price in a June rate cut ... . Previously the first rate cut had been August".
She said traders will be focused on the split of votes in Thursday's MPC meeting, with the last seeing three of the nine voters still calling for rates to be hiked.
No immediate relief for households
As for this week's MPC meeting, the inflation data will provide a major talking point, but, said Danni Hewson, head of financial analysis at AJ Bell, "for households, bruised and bloody after two years of rising prices, today’s number won’t provide a great deal of comfort".
“For mortgage holders who have already dropped off ultra-low fixed rates, adjustments will have been made and some would have been deeply uncomfortable."
She pointed to a recent Which? survey that shows many mortgage holders have been "robbing Peter to pay Paul, missing payments on credit cards or energy bills, just to make sure the roof over their head is paid up to date".
TUC general secretary Paul Nowak said the CPI news “will provide scant relief for hard-pressed families. Prices are still going up – just a little more slowly.
“Britain’s cost of living nightmare is far from over. Real wages are still worth less than in 2008 and household debt is soaring.
“The Conservatives have presided over the worst period of economic stagnation for generations and working people have paid the price.
“We need a proper plan for boosting living standards – not just gimmicks. That means urgent action to reduce insecurity at work and an industrial strategy worth its name.
“And with millions still suffering mortgage misery, and businesses and households struggling with payments on loans, the Bank of England must now start to bring down interest rates.”