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UK's inflation and jobs data point to monetary policy committee sticking to a gradual cuts strategy

BY  Pedro Goncalves · Finance Reporter, Yahoo Finance UK

UK inflation fell more than expected in March, paving the way for the Bank of England (BoE) to cut interest rates next month to 4.25%.

The Consumer Price Index (CPI) measure of inflation fell to 2.6% from 2.8% in February and 3% in January. That means that prices have been rising at the slowest pace since December and are closer to the BoE's 2% target.

The Bank of England will look at today's inflation data and wages when making a decision about whether to hold or cut interest rates.

Most economists are predicting that the main borrowing rate will be cut on 8 May from its current 4.5%.

Financial markets are now betting on an interest rate cut from the BoE meeting at its May meeting, estimating an 86% probability.

Rob Wood, chief UK economist at Pantheon Macroeconomics, sees room for interest rate cuts in May, June and November. However, US tariffs have clouded the economic outlook.

He said: "It’s a finely balanced call, but we look for back-to-back 25bp cuts in May and June, with another cut in November. That call is highly sensitive to president Trump’s actions, the dataflow and the MPC’s comments; we have heard little from rate setters since 'Liberation Day’.

"Rate setters will be cautious — one extra rate cut is a small response to a large economic shock in the form of tariffs — because inflation remains too high for comfort, as does wage growth."

Read more: UK inflation falls to 2.6% in March as price of petrol drops

The BoE has been balancing the risks of a weakening jobs market against the ongoing pressures of strong wage growth and higher household bills.

“In printing broadly in line with our expectations, today’s figures don’t change our view that we expect the Bank of England to cut rates next month by 25bp. While part of the expected rise in April reflects base effects, a good chunk of it does not, so the BoE will likely remain cautious when it comes to rate cuts looking ahead. Gradual and careful will remain the Bank’s mantra," Nomura analysts George Buckley, Andrzej Szczepaniak and Josie Anderson, wrote.

The inflation drop is expected to be short-lived as a raft of increases to household bills kicked in at the start of April. April brings rising energy bills and a raft of changes for utilities and other regulated prices, including council tax, broadband and mobile phone bills.

Ruth Gregory, deputy chief economist at consultancy Capital Economics, said inflation was likely to hit 3% in April due to a 6.4% month-on-month rise in utility bills and 26% month-on-month leap in water bills.

Jonathan Moyes, head of Investment Research at the Wealth Club, said: "This was a slightly softer month for inflation than expected, coming in 0.1% below expectations at 2.6%. This likely gives the Bank of England the green light to cut interest rates in its May meeting.

"The UK economy is not out of the woods yet. There is a long and swinging road to reach the Bank’s 2% target. Services inflation remains stubbornly high, largely due to higher housing costs (higher rents and council tax). The rise in the energy price cap is also set to see inflation jump in April."

Services inflation, a key measure of underlying price pressures for rate-setters, slowed more than expected to 4.7% in March from 5% in February. Economists had forecast 4.8%.

Lindsay James, investment strategist at Quilter, said: “Overall, however, this is a picture of a soft economic outlook. What this brings into play, though, is the scope for further rate cuts. The market is currently pricing in three by the end of the year, with one more cut having been factored in since the so-called ‘Liberation Day’. Should inflation play ball and stay in this 2%-3% range, then we may just see those rate cuts be delivered.”

Read more: Gold prices top $3,300 amid Trump tariff turmoil

Clare Lombardelli, a deputy governor at the BoE, said last week that tariffs were likely to depress economic activity but that their effect on inflation would be harder to forecast.

Danni Hewson, AJ Bell head of financial analysis, said: “At 2.6% inflation is ahead of the Bank’s 2% target but it’s likely to be sufficiently low to give rate setters the green light to keep cutting the base rate, with markets currently pricing in an 85% chance of a quarter percentage point cut at the next meeting.

“The bigger question is where do rates go next? We know increased household costs will colour next month’s data but Donald Trump’s tariff policy could potentially result in a dumping of lower priced goods on UK shores. Concerns about global growth may keep the oil price subdued, though homegrown issues like increased labour costs could result in a significant fall in employment and lower wage growth."

UK pay continued to grow much faster than inflation in the three months to February, though the jobs market showed signs of slowing down.

The average regular earnings excluding bonuses rose 5.9% in the period on an annual basis, according to data from the ONS.

Read more: Bank of England more likely to cut interest rates amid Trump tariff blitz

"Big picture, the MPC has the green light to cut bank rate in May," said Sanjay Raja, chief UK economist at Deutsche Bank. "Trade uncertainty remains rife. And slack in the labor market is emerging."

Monica George Michail, associate economist at NIESR, added: “Today's figures show that annual CPI inflation recorded 2.6% in March 2025. In the coming months, increased public spending and persistent wage growth is likely to drive inflation upwards, although the recent fall in oil prices will exert some downward pressure.

"Nevertheless, we forecast CPI inflation to remain above the Bank of England’s 2% target for the rest of 2025. We expect the Bank to cut rates once more this year, with a further cut on a knife edge”.

The BoE's Monetary Policy Committee (MPC) will announce its decision around interest rates on May 8th at noon.