Interest rates cut on way as inflation falls

INFLATION has fallen from 3.4 to 3.1 per cent official figures are expected to show onwednesday, putting the Bank of England on course to cut rates in June.

The Office for National Statistics is tipped to confirm the rate of consumer price index inflation fell in March due to lower food and energy prices to 3.1 per cent, matching February’s forecast made by the Bank’s Monetary Policy Committee.

Additionally, core CPI inflation, which excludes volatile food, energy, tobacco and alcohol prices, is forecast to fall from 4.5 per cent to 4.2 per cent.

The day before, the ONS is likely to say the rate of average earnings growth, excluding bonuses, has dropped from 6.1 per cent to 5.8 per cent in February. The MPC has already highlighted growth in earnings as a key inflationary concern.

Investec chief economist Philip Shaw said that the data from the ONS puts the MPC “on the path to cutting rates”.

He added: “We think it would be too early for the MPC to start cutting in May, but by the time we get to June, it will have the April pay data and more inflation figures and we think it will have sufficient evidence for it to cut rates.”

Robert Wood, chief UK economist at Pantheon Macroeconomics, said that although inflation in the services sector will probably be slightly stronger than expected, overall inflation could fall below the Bank’s forecast to 3 per cent, increasing the near term likelihood of an interest rate cut.

“The MPC need only see inflation matching its projections to stay on track to cut interest rates in the summer,” he said.

“We expect the first cut in June, with one per quarter after that, in September and December, then four in 2025.”

The last time the MPC cut its base rate was in March 2020. It started hiking in December 2021 and raised its rate a further 13 times to 5.25 per cent, where it has stayed since August.

Bank of America economist Ruben Segura-cayuela said that while the chances of a rate cut before August are increasing, the MPC would be wise to hold fire.

He said: “The bigger picture remains that inflation is likely sticky, so we don’t think early cuts would be the right decision.

“If the Bank starts cutting rates too early, we see risks of their cutting cycle being interrupted by unfavourable data later on.”

Simon French, Panmure Gordon’s chief economist, noted that markets have the odds of a June cut at 50:50 on the assumption the MPC will not want to cut its rate ahead of the US and risk importing inflation.