Inflation drops to two-year low in boost for rate cut hopes

INFLATION has fallen to its lowest level in almost two and a half years, paving the way for interest rate cuts this summer.

The rate of price rises, as measured by the consumer price index (CPI), slowed to 3.4pc in February, according to the Office for National Statistics (ONS). It marked the lowest reading since September 2021.

Inflation fell from 4pc in January, a drop slightly greater than analysts had expected. The better-than-forecast data raised hopes that the Bank of England will begin cutting interest rates in the coming months, with rate setters poised to meet today.

Jeremy Hunt, the Chancellor, said the fall in inflation signalled the Government’s plan for the economy was working and paved the way for future tax cuts. Meanwhile, Rishi Sunak said Britain had “turned a corner after the shocks of the past few years” and was “in a new economic moment”.

The Prime Minister said he believed “2024 will prove to be the year that the economy bounces back”. He rebuffed talk of a backbench plot to oust him that could derail his economic plans, telling the BBC: “What’s important is the future of our country, and people’s financial security and the peace of mind that they rightly deserve.” But economists said the Bank was still likely to hold borrowing costs at their current rate of 5.25pc at this week’s meeting.

It came as the Federal Reserve signalled it was not yet ready to cut rates.

The US central bank held interest rates in a range of 5.25pc to 5.5pc, as the chairman Jerome Powell warned that the American economy was still running too hot to declare victory in the battle against inflation. In Britain, investors expect the Bank to begin cutting interest rates in June. But some analysts believe Threadneedle Street has waited too long, with economists at Citi predicting a “screeching reversal” in the coming months.

Yesterday’s figures revealed core inflation fell faster than expected to 4.5pc from 5.1pc in January, while services inflation, which the Bank is watching closely, eased to 6.1pc from 6.5pc, although this was slightly higher than expected.

Mr Hunt said: “The plan is working. Inflation has not just fallen decisively but is forecast to hit the 2pc target within months.”