Interest rate cut expected after inflation falls to 2.8%

The odds of the Bank of England cutting interest rates in May strengthened yesterday after the latest data revealed inflation cooled by more than forecast last month.

- Richard Partington

In a boost for Rachel Reeves on the day of her spring statement, the Office for National Statistics said inflation as measured by the consumer prices index eased to 2.8% in February from 3% in January.

City economists had predicted a modest decline to 2.9%, after a sharp rise from 2.5% in December amid mounting pressure on households from higher energy bills and the rising cost of groceries. The figures indicate prices are continuing to climb slowly on an annual basis, albeit at a slower rate.

With inflation remaining above the Bank's 2% target, and amid expectations of an increase in the headline rate later this year, the prospect of Threadneedle Street using its next policy meeting in May to cut rates is finely balanced.

However, City traders added to bets on rate cuts in response to the latest snapshot, leading financial markets to price in a 55% chance of the central bank lowering its key base rate by a quarter of a percentage point to 4.25% on 8 May.