UK inflation falls by more than expected in February, triggering talk of lower interest rates

LONDON (news agencies) — Price rises in the U.K. eased by more than anticipated in February, official figures showed Wednesday, raising expectations that the Bank of England may start cutting interest rates in the next few months.

The Office for National Statistics said inflation, as measured by the consumer price index, fell to 3.4%, its lowest level since September 2021, from 4% in January. The agency said easing food price inflation was largely behind the fall.

The decrease was bigger than anticipated. Analysts had expected a decline to 3.6%.

Inflation is still running higher than the Bank of England’s target of 2% but the direction of the move is clear. Inflation hit a high above 11% at the end of 2022 in the wake of Russia’s invasion of Ukraine, which led to sharp increases in energy costs.

The bigger-than-anticipated decline comes a day before the nine rate-setters at the bank announce their latest interest rate decision. The view in financial markets is that they will keep the main interest rate at a 16-year high of 5.25%.

The meeting minutes will be assessed to see how much thought policymakers are giving to cutting interest rates, which should feed through to lower mortgage rates.

“This notable decline is further evidence that the U.K. is fast approaching the finish line in its battle against surging inflation,” said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.

The Bank of England, like the Fed and other central banks around the world, raised interest rates aggressively in late 2021 from near zero to counter price rises first stoked by supply chain issues during the coronavirus pandemic and then Russia’s invasion of Ukraine, which pushed up food and energy costs.

Higher interest rates — which cool the economy by making it more expensive to borrow, thereby bearing down on spending — have contributed to bringing down inflation worldwide.

Britain’s governing Conservative Party hopes that lower inflation and falling interest rates may trigger a feelgood factor ahead of a general election, which has to take place by January 2025. Opinion polls show the main opposition Labour Party way ahead and headed for a big victory over the Conservatives, who have been in power since 2010.