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

Inflation fell to 3.2% in March, the lowest level since 2021. This slowdown could prompt the Bank of England to begin cutting its base rate from 5.25% in June.

According to the Office for National Statistics, the consumer price index fell to a two-and-a-half-year low of 3.2 percent in March. This was below the 3.4 percent of the previous month, but above economists' forecasts of 3.1 percent.

Grant Fitzner, chief economist at the ONS, said: “Inflation fell slightly in March, reaching its lowest annual level for two and a half years.”

“Once again, food prices were the main reason for the decline. Prices rose less than a year ago.

“Similar to last month, we saw partial offset by rising fuel prices.”

Inflation—the rate at which prices rise over time—has been gradually declining since peaking at 11.1% in late 2022. But prices aren't falling. They're just rising less quickly than before.

Core inflation, which excludes energy, food, alcohol and tobacco, fell to 4.2 percent in March from 4.5 percent in the previous month. Analysts had expected a decline to 4.1 percent.

Services sector inflation, closely watched by Bank of England policymakers, fell to 6% in March from 6.1%, above analysts' forecasts of 5.8%.

Read more: IMF predicts that Britain will reach 2% inflation in 2025

This means that inflation in the UK is still lower than in the US, where prices rose by 3.5 percent annually in March. The previous month, it was 3.2 percent, which was higher than economists had predicted. Inflation in the eurozone was provisionally estimated at 2.4 percent per year in March.

Bank of England Governor Andrew Bailey said on Tuesday he saw “strong evidence” that higher interest rates were helping to curb the pace of price increases.

The central bank itself assumes that inflation will fall “briefly” to the target of two percent in the spring and then rise slightly again.

Bailey suggested that interest rates in the UK will continue to fall in the coming months as fears grow that the US will have to delay its rate cuts due to stubborn inflation.

Speaking at the International Monetary Fund (IMF) spring meeting in Washington, he said: “The assessment of interest rates is about how much we need to see now to have confidence in the process.”

His comments come at a time when interest rates in the UK remain at a 16-year high of 5.25 percent.

Chancellor of the Exchequer Jeremy Hunt said: “The plan is working: inflation is falling faster than expected, from over 11% to 3.2%, the lowest level in almost two and a half years, so people's money will last further.”

“This welcome news comes on top of our cuts to national insurance, which will save the average worker £900 a year, so people should soon feel the difference and see it in their paycheck too.”

The story continues

Read more: Bank of England faces interest rate dilemma as labour market cools

Food and non-alcoholic beverage prices rose 4% in the year to March 2024, compared with 5% in February. March's figure is the lowest annual rate since November 2021, the ONS reports. Inflation for bread and cereals and meat fell.

Prime Minister Rishi Sunak celebrated the new inflation data, even though it fell less than expected.

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

“The overall inflation outlook remains broadly positive, but there are several risks that could lead to a setback. Oil prices have risen over the past month, leading to higher prices at the pump for consumers. The increase in the national minimum wage could also potentially help sustain services inflation, which remains high,” she said.

“Today's data is unlikely to move the Bank of England forward. We expect inflation to return to target over the course of the spring, raising the prospect of rate cuts from June,” she added.

Market prices currently suggest that 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 at Premier Miton Diversified Funds, commented: “Inflation in the UK remained slightly higher than hoped in March, reflecting the strength of the economy, particularly the consumer sector, which is in reasonably good shape.

“Everyone will inevitably be wondering what this means for rate cuts. The answer is probably not much, as inflation here is simply not coming down as quickly as hoped. But the data suggests that the Bank of England is unlikely to be at the forefront when it comes to who cuts rates first: it, the Fed or the ECB.”

Watch: Bank of England governor discusses rate cut prospects as inflation falls to 3.2%

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