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Decline in UK Inflation Signals Potential BoE Rate Cuts Later in 2024

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British inflation slowed more than expected in February, potentially paving the way for future interest rate cuts, according to economists and the Bank of England. Data from the Office for National Statistics revealed that consumer prices increased by 3.4% in February compared to a year earlier, down from January’s 4.0% rise and marking the lowest inflation rate since September 2021. This figure came in below both economists’ forecast of a 3.5% annual rate and the Bank of England’s own projection.

The decline in inflation was largely driven by decreases in food and restaurant prices, although this was partly offset by higher motor fuel costs. Core inflation, which excludes energy, food, and tobacco prices, also saw a slowdown to 4.5% from January’s 5.1%, slightly below the anticipated 4.6%.

These findings come ahead of the Bank of England’s scheduled vote on interest rates, with their policy decision announcement expected at 1200 GMT on Thursday. Investors have begun speculating about potential interest rate cuts, with some predicting action as soon as August. Despite this speculation, the value of the pound remained relatively stable.

Paul Dales, chief UK economist at Capital Economics, noted that inflation is following a trajectory that aligns with the Bank of England’s suggested rationale for interest rate reductions. Services inflation, a key indicator monitored by the Bank of England, also moderated to 6.1% from 6.5% in January, in line with the central bank’s expectations.

While the Bank of England has hinted at potential future rate cuts, it remains cautious due to persistent underlying inflation pressures. The central bank and the government’s fiscal forecaster anticipate inflation, which peaked above 11% in October 2022, to gradually return to the Bank of England’s 2% target in the coming months. These figures are likely to be welcomed by Prime Minister Rishi Sunak ahead of anticipated national elections, although the Conservative Party faces challenges in opinion polls.

Responding to the data, Finance Minister Jeremy Hunt expressed optimism about the economy’s prospects, suggesting that positive economic conditions could support the government’s goal of reducing social security taxes. Hunt recently announced a reduction in social security contributions on March 6, but emphasized that any further tax cuts would be contingent upon maintaining fiscal responsibility without compromising public services.

The Labour Party highlighted ongoing concerns about high prices and the economic impact of Conservative governance over the past 14 years.