In March, inflation in the UK moderated to 3.2% from 3.4%, as reported by the Office for National Statistics (ONS) on Wednesday. However, higher-than-anticipated figures have prompted investors to reconsider the timing of the first rate cut by the Bank of England (BOE).
Expectations were for a reading of 3.1%, according to economists surveyed by Reuters. While food prices exerted downward pressure on the headline rate, motor fuels contributed to its increase.
The core inflation figure, excluding energy, food, alcohol, and tobacco, surpassed projections at 4.2%, compared to the anticipated 4.1%. Services inflation, closely monitored by UK policymakers, also remained elevated at 6%, above both economist forecasts and BOE expectations.
Concerns have been mounting over signs of a cooling UK labor market, with unemployment unexpectedly rising to 4.2% between December and February. Meanwhile, wage growth excluding bonuses dipped to 6% in February from 6.1% in January.
BOE Governor Andrew Bailey noted the effectiveness of higher interest rates in curbing price rises but emphasized that inflation is expected to temporarily drop to the 2% target before rising slightly in the spring.
However, the core inflation print for March, exceeding 4%, suggests that inflation may persist longer than anticipated, possibly delaying the timing of interest rate cuts.
Market sentiment shifted, with most investors now foreseeing a 25-basis-point rate cut in September or November, rather than June, from the current rate of 5.25%. Uncertainty looms over central bank decisions globally, particularly in light of ongoing inflationary pressures in the US.
Camille de Courcel, head of European rates strategy at BNP Paribas, highlighted the UK’s trajectory mirroring that of the US, potentially affecting prior expectations for a June rate cut.
While some anticipate a significant drop in next month’s inflation reading, others warn of lingering inflation risks, including geopolitical tensions in the Middle East.
The British pound strengthened against both the US dollar and euro following the announcement. Finance Minister Jeremy Hunt welcomed the inflation data, signaling positive sentiment ahead of a looming national election.
