UK inflation data came in lower than expected for February, but the Bank of England is not expected to cut interest rates at Thursday's meeting.
The consumer price index (CPI) rose 3.4% in February from a year before, having increased 4.0% annually in January, according to new data from the Office for National Statistics on Wednesday.
This was below forecasts for a 3.6% rise and increases pressure on the Bank to ease monetary policy, even as CPI remains above the 2% inflation target – although way below the 11.1% peak seen in October 2022.
"Energy was a key upward contributor to the move in year-on-year CPI inflation in February, due to transport fuel," says Melanie Baker, senior economist at Royal London Asset Management.
"Offsetting this, though, there were large downside contributions to inflation in February from food and restaurants and cafes, apparently largely driven by alcohol."
Services Inflation Slowing
The Bank of England, ahead of possible rate cuts this year, remains worried about wage growth and services sector inflation. But RLAM's Baker notes there are some positive trends in this month’s ONS dataset.
"In terms of key indicators of underlying inflation pressure or domestically driven inflation, things were also more encouraging than last month," she says.
"Services inflation clearly remains at very high levels but, except for housing services, where rental inflation picked up, the main categories of services inflation all slowed at least a bit."
On a monthly basis, CPI rose by 0.6%, below the 0.7% seen in January. The retail price index (RPI), rose by 4.5% annually in February, following a 4.9% rise in January, in line with forecasts.
Will the Bank of England Now Cut Rates?
A better-than-expected inflation print, even though it's only over one month, will heighten the clamour for rate cuts. At the end of last year, economists predicted the Bank would start reversing its substantial rate hikes as early as March. But markets are now pricing in rate cuts for the BoE, Federal Reserve, and European Central Bank in June. The Federal Reserve decision is scheduled for tonight.
We rounded up some expert commentary on the likely impact of today's data on UK rates.
Zara Nokes, global market analyst, J.P. Morgan Asset Management
"The Bank will [keep] a watchful eye on the medium-term inflation outlook, particularly the domestically-generated inflation originating from the services sector.
"With regular wage growth north of 6% and services inflation still running hot, the Bank will need further evidence that domestic price pressures are cooling before it begins cutting rates."
Melanie Baker, senior economist, RLAM
"Many of the major central banks at this stage seem to want more confidence and more evidence that inflation is on track to sustainably hit inflation targets before starting to cut rates.
"As far as it goes, today’s data should be modestly encouraging from a Bank of England perspective: headline CPI was a tenth below the staff forecast from February's Monetary Policy Report and services inflation was in line with the staff forecast."
Neil Birrell, chief investment officer, Premier Miton Investors, and lead fund manager, Premier Miton Diversified Funds
"This won't be enough for a cut in interest rates in the very short term but does give backing to the view that the UK economy is performing. Rate cut expectations for the middle of the year are well founded."
Kathleen Brooks, research director, XTB
"This does not shift the dial for Thursday's BoE meeting, in our view, and we expect the BoE to continue to signal that the war on inflation is not yet over. The Bank needs to see more evidence on the outlook for price growth before rates can be cut.
"However, this does shift the dial for the Bank's May meeting, where we expect to get an update on the timing of rate cuts."
Charles Hepworth, investment director, GAM Investments
"This disinflationary tailwind will encourage market expectations of rate cuts coming this summer and market forecasts expect three 0.25% cuts for the year in total. This is likely the best a government pushing for an autumn election could hope for."
Steve Matthews, investment director, liquidity, Canada Life Asset Management:
"After today's data, attention now turns to the BoE committee's remaining two hawks – Jonathan Haskel and Catherine Mann – who voted for a rate hike in February. The fall to 3.4% might alleviate some concerns, leading Haskel or Mann to shift to hold at tomorrow’s committee meeting and signalling that a June cut could be on the cards.
"They will, however, still be wary of the 9.8% National Living Wage rise coming into force in April and the potential this may feed inflation. Our view remains a first cut of 25bps in August is still the most likely scenario."
Stephen Payne, portfolio manager, Janus Henderson
"Sticky services inflation may give the MPC pause for thought though, so I expect market reaction to be muted, with the timing expectation for rate cuts most likely little changed."
Rachel Winter, partner, Killik & Co
"Although it is not expected that the Bank of England will cut rates when it meets tomorrow, the fall in inflation should encourage it to start doing so later this year, which should be good news for stocks, bonds, and property."
