UK Inflation Slows in February, but BoE Rate Cut Still a Distant Prospect; GBP/USD Dips

Will a February Inflation Dip Soften the BoE’s Rate Stance?

On Wednesday, March 26, February’s UK Inflation Report reignited speculation about the timing of the next Bank of England (BoE) rate cut.

The UK’s annual inflation rate (headline) eased from 3.0% in January to 2.8% in February, remaining well above the BoE’s 2% target. Economists expected headline inflation of 2.9%. February’s modest decline will likely keep the door closed on a near-term rate cut, contingent on Friday’s GDP data delivering no surprises.

Key Data from the Office for National Statistics included:

• The Consumer Prices Index, including owner-occupier housing costs (CPIH), rose by 3.7% in the 12 months to February, after rising 3.9% in January.
• The largest downward contribution came from clothing and also housing and household services. There were no significant, offsetting upward contributions to inflation.
• The Core CPIH (excluding energy, food, alcohol, and tobacco) increased by 4.4% in the 12 months to February, compared with 4.6% in January.
• Core CPI (excluding energy, food, alcohol, and tobacco) softened from 3.7% in the 12 months to January to 3.5% in the 12 months to February.
• The CPI services annual rate rose to 5% in February, unchanged from January.

BoE Outlook: Holding Rates While Headwinds Gather

At its March 20 meeting, the BoE’s Monetary Policy Committee voted 8-1 to keep the Bank’s rate at 4.5%. The latest Services PMI, Wage growth, and February’s inflation numbers are unlikely to advance the timing of rate cuts.

• Wage data showed average earnings, excluding bonuses, rose 5.9% in the three months to January 2025, unchanged from December.
• The UK S&P Global Services PMI climbed to 53.2 in March, up from 51.0 in February, with service firms citing wage-driven increases driving input and output prices higher.

While services inflation and wage growth support a near-term BoE hold, headwinds loom.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, commented on the March PMI Report:

“Worryingly, these headwinds are likely to grow in force as higher National Insurance contributions come into effect in April, coinciding with the anticipated review of US tariff policy on 2nd April, the latter having the potential to further subdue global economic growth and dampen UK trade.”

Williamson highlighted key headwinds. These included:

• Additional costs on businesses in the budget.
• Low business and consumer confidence.
• Sluggish demand at home and abroad.
• Uncertainty resulting from tariff policies as headwinds.

Market Views: Rate Cut Hopes May Fade

Bob Elliott, Chief Investment Officer at Unlimited Funds, remarked on last week’s UK labor Market Overview Report:

“The BoE is hamstrung by a UK labor market that is tight enough to keep wages and service inflation elevated, but too weak to drive an acceptable pace of overall growth. Data released today shows anemic job growth, but wage growth that’s far too high for cuts ahead.”

A tight labor market, wage growth, and services inflation may continue tempering bets on an H1 2025 BoE rate cut.

GBP/USD Volatility Post-Inflation Data

Ahead of the UK inflation report, the GBP/USD briefly climbed to a high of $1.29485 before dropping to a low of $1.29262.

However, the reaction after the release was mixed, with price action lacking clear direction as traders assessed the inflation figures. After the inflation report, the GBP/USD fell from $1.29401 to a low of $1.29170 before steadying.

On Wednesday, March 26, the GBP/USD was down 0.15% to $1.29232.

Looking Ahead

Markets now await the UK Chancellor’s Spring Statement. Weaker growth projections and potential tax hikes could sink the British Pound. Constraints on spending and weakening economic outlook may raise expectations for an H1 2025 BoE rate cut.

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