By Yara Abi Farraj
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U.K. inflation slows to 3.2 percent, sparking rate cut speculations

Investors lower expectations for the scale and timing of future rate cuts
U.K. inflation slows to 3.2 percent, sparking rate cut speculations
Data also revealed that core inflation in the U.K. declined from 4.5 percent to 4.2 percent

Inflation in the United Kingdom (U.K.) slowed to 3.2 percent in March from 3.4 percent in February, according to the Office for National Statistics, signaling a potential delay in the Bank of England’s anticipated interest rate cut. Despite expectations for a sharper decline, the modest drop in consumer prices could impact the central bank’s policy outlook.

The Bank of England, which aims to slow inflation to 2 percent, had forecasted a more substantial decline in inflation to 3.1 percent in March. This unexpected outcome led investors to revise their expectations for interest rate cuts, resulting in a strengthening of the sterling.

The slowdown in the U.K.’s inflation rate follows the recent acceleration of headline price growth in the United States, which rose for a second consecutive month to 3.5 percent in March. Bank of England governor Andrew Bailey recently emphasized that inflation dynamics in the U.S. and Europe could impact interest rate cut decisions in the U.K.

Analysts noted the potential risk of the U.K. following the inflationary trend of the U.S., indicating a less imminent need for rate cuts. Meanwhile, investors reacted to the data by scaling back their expectations for the scale and timing of future rate cuts, with one quarter-point cut fully priced in by the end of 2024, possibly as late as November.

Read: U.K. unemployment rate hits 6-month high of 4.2 percent, exceeding expectations

Drivers of inflation slowdown

Data also revealed that core inflation in the U.K. declined from 4.5 percent to 4.2 percent while services inflation eased to 6 percent from 6.1 percent.

The Office for National Statistics attributes the decline in the U.K.’s inflation to the decline in food prices. Prices of food and non-alcoholic beverages increased by 4 percent in the last year, their weakest rise since November 2021. However, the increase in fuel prices impacted the slowdown in inflation in March.
While wage growth in the U.K. has cooled, it remains robust compared to historical standards. The Bank of England remains vigilant about the potential impact of rapid wage growth on inflationary pressures, particularly within the services sector.

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