UK Inflation Falls to 2.6%, Boosting Hopes of Further Interest Rate Cuts

UK inflation has eased to 2.6% in March 2025, marking its lowest level since October 2024 and bolstering expectations for additional interest rate cuts by the Bank of England (BoE) .

This decline from February's 2.8% rate is largely attributed to falling fuel prices and stable food costs .​

Key Drivers Behind the Decline

The Office for National Statistics (ONS) reports that the reduction in inflation is primarily due to a significant drop in petrol prices, which fell from 144.8p per litre in March 2024 to 137.5p in March 2025 . Additionally, modest spending on leisure activities helped offset rising costs in clothing, footwear, and utilities.​

Core inflation, which excludes volatile items like energy and food, also saw a slight decrease to 3.4% from 3.5% in February . Services inflation, a key indicator for the BoE, declined to 4.7% from 5% .​

The BoE has already reduced interest rates three times since August 2024, bringing the base rate down to 4.5% in February 2025 . With inflation continuing to trend downward, financial markets are now pricing in an 86% chance of another rate cut in May, potentially lowering the rate to 4.25% .​

However, the BoE remains cautious, noting that inflation is expected to rise temporarily in the coming months due to increases in energy prices and regulated costs like water bills . Despite these anticipated short-term increases, the central bank projects inflation will return to its 2% target thereafter.​

Economic Outlook and Labour Market Trends

While the decline in inflation is a positive sign, the UK labour market is showing signs of weakening. Employment dropped by 78,000 in March, the largest decline since the early pandemic, and vacancies have fallen below pre-pandemic levels . Despite this, wage growth remains robust, with average weekly earnings excluding bonuses rising by 5.9% annually .​

The BoE faces a complex scenario as it balances the need to support economic growth with the goal of maintaining inflation near its target. Economists predict that the central bank may proceed with further rate cuts, but a return to the historically low rates seen after the 2008 financial crisis and the COVID-19 pandemic is unlikely .​

Global Factors and Future Considerations

Global economic uncertainties, including recent U.S. tariffs on Chinese goods, add complexity to the UK's inflation outlook. These tariffs could potentially suppress UK inflation through increased imports of discounted goods . However, they also contribute to broader economic volatility, which the BoE must consider in its monetary policy decisions.​

Source: BBC News