U.K. Inflation Surges to 10-Month High, Dampening Rate Cut Expectations
Inflation in the United Kingdom accelerated to a 10-month high in January, reaching 3%, according to data released by the Office for National Statistics. This represents a significant increase from the previous month's 2.5% rate.
The surge, which exceeds the Bank of England's target of 2%, is primarily attributed to rising airfares, food costs, and private school fees following the implementation of a sales tax by the new Labour government.
Economists had anticipated an increase to 2.8%, but the magnitude of the rise has raised concerns among rate-setters at the Bank of England. The central bank has recently expressed concerns about the U.K.'s modest economic growth.
Earlier this month, the bank cut its main interest rate by 0.25% to 4.50%, marking its third reduction in six months. This decision was driven by the bank's decision to halve its 2025 growth forecast for the U.K. to 0.75%.
The persistence of slow growth poses a significant challenge for the new Labour government, which has prioritized economic growth to improve living standards and fund public services. The party's popularity has declined since its election victory in July due to the failure to achieve its growth targets.
The government is likely to seek additional assistance from the central bank through further interest rate cuts. Lower rates would lead to reduced mortgage rates and loan costs, although they may also impact returns for savers.
Experts predict that inflation will continue to rise in the coming months due to higher domestic energy bills. However, they anticipate a downward trend in the second half of the year, providing policymakers with an opportunity to cut interest rates again. However, the number of cuts may be less than previously anticipated.
"Another rate cut in March seems unlikely, as the bank continues its gradual approach to easing," said Luke Bartholomew, deputy chief economist at abrdn (formerly Aberdeen Asset Management). "Any acceleration in the pace of rate cuts later in the year will depend on inflation pressures returning towards 2%."