UK interest rate cut expected in March after inflation drop

LONDON (AP) — Inflation in the U.K. fell to a 10-month low largely on the back of lower food and gas prices, official figures showed Wednesday, a downward move that has reinforced expectations that the Bank of England will cut interest rates in March.

The Office for National Statistics said the consumer prices index was 3% higher in January than the year before, down from 3.4% in December.

The decline was in line with analysts' expectations and puts inflation well on the path to the central bank's target of 2% over the coming months. When keeping its main interest rate on hold at 3.75% at its last meeting earlier this month, the bank predicted that inflation would be back at target by April.

The further fall in inflation will provide some relief for the Labour government, which has seen its poll ratings fall sharply since it returned to power in July 2024, partly because of cost-of-living pressures.

”Cutting the cost of living is my number one priority," Treasury chief Rachel Reeves said Wednesday.

Inflation is set to hit the target in April, largely because of government action. In her budget last November, Reeves announced that she would be cutting some taxes to get domestic energy bills down.

With inflation down, an interest rate reduction in March is now widely expected. The bigger question in financial markets is how many further reductions there will be this year.

“Inflation is set to fall further in coming months, falling back to 2% in the near future, which should open up further rate cuts later this year,” said Luke Bartholomew, deputy chief economist at asset management firm Aberdeen.