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UK inflation drops to 3.2% in March as Bank of England hints at rate cuts

inflation: A customer shops at a supermarket
Food prices have eased as inflation dropped to 3.2% in March. (Stefan Wermuth / reuters)

Inflation has eased to 3.2% in March, the lowest level since 2021, a cool-down that could influence the Bank of England to start cutting interest rates from 5.25% in June.

The consumer prices index dropped to a two and a half-year low of 3.2% in March, according to the Office for National Statistics, which was down from 3.4% the previous month but higher than economists’ forecasts of 3.1%.

Grant Fitzner, chief economist at the ONS, said: "Inflation eased slightly in March to its lowest annual rate for two and a half years.

"Once again, food prices were the main reason for the fall, with prices rising by less than we saw a year ago.

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"Similarly to last month, we saw a partial offset from rising fuel prices."

Inflation – the rate at which prices rise over time, has been falling gradually since it peaked in late 2022. at 11.1%. However, prices are not falling. They are are just rising less quickly than they were before.

Core inflation, which strips out energy, food, alcohol and tobacco, dropped to 4.2% in March from 4.5% in the previous month. Analysts expected a drop to 4.1%.

Services inflation, which is closely watched by policymakers at the Bank of England, fell from 6.1% to 6% in March, which was higher than analysts predictions of 5.8%.

Read more: IMF forecasts UK will hit 2% inflation target in 2025

It still leaves inflation lower in the UK than in the US, where prices rose at an annual pace of 3.5% in March, up from 3.2% the prior month and higher than economists had forecast. Eurozone inflation was provisionally estimated at 2.4% per year in March.

Bank of England governor Andrew Bailey on Tuesday said he saw “strong evidence” that higher interest rates were working to tame the rate of price rises.

The central bank’s own forecast is for inflation to “briefly drop” to its 2% target in the spring before increasing slightly.

Bailey signalled that UK interest rates remain on course to fall in the coming months amid growing fears that stubborn inflation will force the US to delay rate cuts.

He said at the International Monetary Fund (IMF) spring meetings in Washington: “Our judgement with interest rates is how much do we need to see now to be confident of the process?”

His comments come as UK interest rates remain at a 16-year-high of 5.25%.

Chancellor Jeremy Hunt said:"The plan is working: inflation is falling faster than expected, down from over 11% to 3.2%, the lowest level in nearly two and a half years, helping people’s money go further.

"This welcome news comes on top of our cuts to national insurance, which save the average worker £900 a year, so people should start to feel the difference as well as see it in their pay cheques."

Read more: Bank of England faces interest rates dilemma as job market cools

Prices for food and non-alcoholic beverages rose by 4% in the year to March 2024, down from 5% to February. The March figure is the lowest annual rate since November 2021, the ONS reports. Inflation bread and cereals, and for meat, both eased.

Prime minister Rishi Sunak has celebrated the new inflation data, despite it falling by less than expected.

Yael Selfin, chief economist at KPMG UK, warned that inflation could soon return to target, but risks remain.

“The overall outlook for inflation remains broadly positive, however there are several risks which could cause a setback. Oil prices have rallied over the past month which has led to an increase in prices at the pump for consumers. Also, the hike in the National Living Wage could potentially contribute to persistence in services inflation which remains elevated," she said.

“Today’s data are unlikely to move the needle for the Bank of England. We expect inflation to return to target later this spring, which raises the prospect of interest rate cuts from June onwards," she added.

Market pricing currently suggests the BoE will implement two interest rate cuts in 2024 starting in August or September.

Neil Birrell, chief investment officer at Premier Miton Investors and lead fund manager, Premier Miton Diversified Funds, commented:  “UK inflation remained a little higher than hoped in March, reflecting the strength of the economy, particularly the consumer sector, which is in pretty good shape.

"Inevitably everyone will be wondering what this means for interest rate cuts. The answer is probably not much, as this is just a case of inflation not slowing as quickly as hoped. However, the data does mean it’s unlikely the Bank of England will move to the top of the starting grid when it comes to who cuts first; them, the Fed or the ECB.”

Watch: Bank of England governor talks up interest rate cut prospects as inflation eases to 3.2%

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