British inflation cools more than expected in February

British inflation slowed more than expected in February, bringing some relief to consumers ahead of a likely new pick-up in price growth and to finance minister Rachel Reeves before her budget update speech on Wednesday.

Consumer prices rose by 2.8 per cent in annual terms in February after a 3.0 per cent increase in January, the Office for National Statistics said, as clothing and footwear prices fell for the first time in more than three years.

Economists polled by Reuters had pointed to a reading of 2.9 per cent in February while the Bank of England had expected 2.8 per cent in a set of forecasts published in early February.

Sterling fell by more than a third of a cent against the US dollar.

Two-year British government bond yields, which are sensitive to speculation about BoE interest rates, fell by almost seven basis points, on track for their biggest daily fall in almost two months.

Economists warned that rising energy prices will push inflation up again soon.

“February’s slowdown is a false dawn as notable near-term price rises are already baked in, with next month’s jump in energy bills and national insurance likely to push inflation perilously close to 4 per cent sooner rather than later,” Suren Thiru, Economics Director at accountancy body ICAEW, said.

He said the BoE would remain wary about price pressures.

“While a May policy loosening remains on the table, rate setters will want to gauge the effect of April’s major jump in business costs and any measures announced in the Spring Statement before proceeding with another rate cut,” Thiru said.

But Luke Bartholomew, deputy chief economist at investment firm Aberdeen, said the BoE would probably take comfort from Wednesday’s data.

“This report does not fundamentally change the outlook for inflation, but it should keep the path clear for another interest rate cut in May,” Bartholomew said.

The central bank expects consumer price inflation to peak at 3.75 per cent in the third quarter of this year - almost double its 2 per cent target - driven mostly by higher energy costs and regulated tariffs for household utility bills and bus fares.

Last week, the BoE warned investors against assuming that borrowing costs would be cut quickly.

The Office for National Statistics said services inflation - closely watched by the BoE - held at an annual rate of 5.0 per cent, against expectations for a fall to 4.9 per cent. The central bank had expected it would rise to 5.1 per cent in Wednesday’s data.

James Smith, an ING economist, said the services inflation data represented a tentative sign that the government’s increase in employer taxes from next month was having an impact on prices.

“It should still fall back in the second quarter, though, keeping the Bank of England on track for three further rate cuts this year,” Smith said.

Meanwhile the British government bond yields and the pound fell on Wednesday after data showed UK inflation slowed more than expected in February, offering some respite for finance minister Rachel Reeves ahead of a high-stakes fiscal statement later in the day.

Data showed inflation cooled to an annual rate of 2.8% in February from 3.0 per cent in January. That was below analysts’ expectations of 2.9 per cent, although many warned energy prices and tax increases would push the rate back up towards 4% this year.

Bond investors cheered the inflation figures, with yields on interest-rate sensitive two-year gilts down 6 basis points (bps) to 4.243%. Yields move inversely to prices.

Traders in money markets nudged up their bets on Bank of England rate cuts this year, according to swap market prices, and now see 45 bps of reductions compared to 40 bps on Tuesday.

“Ahead of the spring statement, today’s inflation data should give Chancellor Reeves some reprieve,” said Sanjay Raja, chief UK economist at Deutsche Bank.

The UK’s FTSE 100 edged up on Wednesday after a reading on inflation came in slightly below expectations, offering comfort to investors ahead of Finance Minister Rachel Reeves’ budget update later in the day.

The blue-chip FTSE 100 rose 0.1 per cent as of 1017 GMT, while the midcap FTSE 250 index climbed 0.5 per cent.

British inflation slowed by more than expected in February, bringing some relief to consumers ahead of a likely new pick-up in price growth and to Reeves before her speech scheduled for 1230 GMT.

Sterling weakened slightly following the inflation data release.

Economists warned that rising energy prices will push inflation up again soon.

Agencies