UK inflation eased to 3.2% in March from 3.4%, the Office for National Statistics said on Wednesday, but the better-than-expected figures prompted investors to push back the timing of the first Bank of England interest rate cut. .
Economists polled by Reuters had expected an estimate of 3.1%.
Food prices provided the biggest downward drag on the headline rate, the ONS said, while motor fuels outweighed it.
Excluding energy, food, alcohol and tobacco, the headline figure was 4.2%, compared with a projected 4.1%. Services inflation, a key watchdog for UK monetary policymakers, eased from 6.1% to 6% – again above the expectations of both economists and the BOE.
This week, investors are watching for signs that the UK labor market is cooling, with unemployment unexpectedly rising to 4.2% between December and February. Wage growth Excluding bonuses, it fell to 6% in February from 6.1% in January.
BOE Governor Andrew Bailey said on Tuesday He found “strong evidence” that higher interest rates are working to moderate inflation, cooling from a peak of 11.1% in October 2022. The central bank's own forecast is that inflation will “decline briefly” to its 2% level. Aim for spring before increasing slightly.
But a stronger-than-expected March key axis of more than 4% is likely to fuel speculation that inflation is proving stickier than recent forecasts suggest, and the timing of the first interest rate cuts will move further down.
Market prices shifted on Wednesday, with most investors now seeing the first cut of 25 basis points from the current 5.25% rate in September or November, with only a 25% chance of a June trim.
Uncertainty has been raised over the path of central banks around the world, and given signs of continued inflationary pressures in the US, analysts are questioning who will step up ahead of the Federal Reserve.
Camille de Courcel, head of European rates strategy at BNP Paribas, told CNBC's “Squawk Box Europe” on Wednesday that the latest data showed the UK was moving “in the direction of the US” and added risk to her earlier call for June rates. Clipped from BOE.
Although the labor force data was a negative surprise, the ONS cautioned that its month-on-month figures could be skewed by systematic issues. That means the BOE's monetary policy committee will focus more on upside surprises in wage growth and services, de Courcelle said.
Few expect a sharp drop in inflation in next month's estimate due to the year-on-year impact of utility prices.
Ruth Gregory, deputy chief UK economist at Capital Economics, said in a note on Wednesday that she expects the axis to fall below the 2% target in April, and if inflation continues to fall in the coming months, the BOE may still opt for a June cut. But the risks of US-style stickiness or inflation fueled by geopolitical tensions in the Middle East are high, he added.
The British pound rose against both the US dollar and the euro following the announcement, gaining 0.3% to $1.246 against the greenback and 0.2% stronger to 1.172 against the euro.
UK finance minister Jeremy Hunt, who is gearing up for a national election this year, said on social media site X that the inflation data was “welcome news”.
