Inflation in the United Kingdom fell more than expected in January, opening the door for interest rate cuts soon.
UK inflation fell more than expected in February, data released on Wednesday showed. Reuters-polled analysts were expecting a 3.5% annual inflation and a 0.7% month-on-month rise.
Instead, prices in the United Kingdom fell to 3.4% annually and a 0.6% increase in February compared to January. The previous reading showed a 4% annual inflation and a -0.6% decrease compared to December.
According to the Office of National Statistics (ONS), food and alcoholic beverages were the biggest drivers of inflation, rising 5% compared to 7% in January.
This brings the UK to the lowest inflation level since September 2021. Chancellor of the Exchequer Jeremy Hunt said that Wednesday’s reading “sets the scene for better economic conditions” for the United Kingdom.
Jeremy Hunt became the UK’s finance minister under the current Rishi Sunak government. The UK Conservative Party faces a likely defeat at the next elections, set to happen by January 2025. Every poll shows a landslide victory for the Labour Party, which has been in the opposition since 2010.
Sunak hopes to sway at least part of the votes in his direction, though it appears extremely unlikely. Under the Conservative rule, the United Kingdom abandoned the European Union, a move now considered widely unpopular in the entire country.
Recession and rates
The United Kingdom fell into a technical recession in the last quarter of 2023. GDP growth fell by 0.3% in Q4, following another contraction of 0.1% between July and September. A country technically slips into a recession after two consecutive quarters of GDP contraction.
Since the Brexit referendum, the UK economy has stagnated compared to its European peers, though it wasn’t hit as hard as Germany by the recent energy crisis.
However, inflation in the United Kingdom reached the highest level in Western Europe, breaking the 12% mark in 2022. Although prices are falling fast, they remain above the 2.6% Eurozone level.
To counter rising inflation, the Bank of England increased interest rates to 5.25%, a 16-year high. With prices falling more than expected, markets now believe the BoE will start cutting rates in the following months.
The Bank of England and the European Central Bank started increasing rates following the Russian invasion of Ukraine. Current debates among market investors concern the timeline of rate cuts, widely expected to happen within the year.
The ECB is currently more hawkish than the BoE, with committee members saying Frankfurt will start cutting rates after the US Federal Reserve does. Given how fast inflation is decreasing in the UK, it’s likely they will not wait for the Fed.
