UK inflation holds steady at 4%

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UK inflation stayed steady at 4 per cent last month, undershooting forecasts and leading traders to increase bets that the Bank of England will cut interest rates on the back of easing price pressures from the summer.

Consumer prices rose at an annual rate of 4 per cent in January, the same rate as in December, the Office for National Statistics said on Wednesday. Month on month, consumer prices declined by 0.6 per cent.

Although inflation was still double the BoE’s target, analysts had expected an uptick to 4.2 per cent, slightly above the central bank’s estimate of 4.1 per cent.

The figures prompted traders in the swaps market — which reflects predictions of the future level of BoE interest rates — to increase bets that the central bank could start cutting its benchmark rate, which stands at 5.25 per cent, from June.

Traders are now pricing a quarter-point cut by that month as a 65 per cent probability, up from 40 per cent before the data was released. Markets moved to price in close to three quarter-point rate cuts by the BoE this year, up from nearer two before the ONS release.

Sterling nudged lower after the figures, sliding 0.3 per cent to $1.2550. Interest rate-sensitive two-year gilt yields dropped 0.11 percentage points to 4.57 per cent while the FTSE 100 rose 0.7 per cent.

The data showed the biggest downward pressures coming from food and household goods. Services inflation, which policymakers view as a better measure of domestic price pressures, was also lower than expected, edging up from 6.4 per cent to 6.5 per cent.

Core inflation — which excludes energy, food, alcohol and tobacco — remained steady at 5.1 per cent.

“The surge in prices of the pandemic and energy crisis will soon be a bad memory,” said Thomas Pugh, economist at audit firm RSM UK, adding that a further near-term drop in inflation could allow the BoE to…