(Bloomberg) — UK inflation unexpectedly cooled, strengthening the case for the Bank of England to cut interest rates again in May and providing a morale boost for Chancellor of the Exchequer Rachel Reeves ahead of a key economic statement Wednesday.
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Consumer prices climbed 2.8% in February from a year earlier, slowing from 3% the previous month, the Office for National Statistics said. It was below the 3% economists were expecting on average and in line with the 2.8% predicted by the BOE last month. Clothing prices were the biggest driver of the slowdown, while goods price inflation also eased, the ONS said.
Traders added to bets on interest-rate cuts in response, and now see a 72% chance of a reduction in May. That helped spur a rally in UK bonds, bringing down yields on short-dated gilts that are the most sensitive to monetary policy by around 8 basis points to 4.22%. The pound slumped as much as 0.5% to $1.2886.
The figures come hours before the chancellor unveils her highly-anticipated spring statement, in which she is expected to slash government spending to put the public finances back on track and downgrade growth forecasts made less than six months ago. Reeves has argued that by sticking to her self-imposed fiscal rules — including that day-to-day spending must be funded by taxation — she has brought the stability needed for the BOE to cut interest rates and bring down mortgage costs for millions of Britons.
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“Both the Bank of England and the Chancellor will be somewhat relieved by the drop in headline inflation,” said Luke Bartholomew, deputy chief economist at Aberdeen. “Slightly lower inflation should also mean less pressure on gilt yields, which remain a major concern for the chancellor.”
Yields on UK bonds soared in the wake of Reeves’ October budget as investors baulked at the amount of borrowing needed to finance the government’s plans. Another market tantrum in January again pushed up the nation’s funding costs, eroding Reeves’ fiscal headroom and helping precipitate the swathe of spending cuts expected in Wednesday’s statement. The government will also announce its bond issuance plans for the 2025-2026 fiscal year.
Chief Secretary to the Treasury Darren Jones said in a statement: “Our number one mission is kickstarting growth to raise living standards for working people, that is why we are protecting working people’s payslips from higher taxes.”
