UK Inflation Slows Sharply in January, Strengthening Case for Bank of England Rate Cut
Consumer price inflation in the United Kingdom fell to its lowest level in ten months, intensifying expectations that the Bank of England will reduce interest rates in March.
Inflation in the United Kingdom eased notably in January 2026, with the consumer price index rising three per cent on the year, its lowest annual pace since March 2025 and down from three point four per cent in December.
This marked slowdown was driven by declines in food, petrol and air fare prices, offering tangible relief to household budgets and aligning closely with market expectations.
Underlying inflation measures also softened, with core inflation dipping to around three point one per cent, while services price growth eased more modestly.
The data bolster growing anticipation among investors and economists that the Bank of England’s Monetary Policy Committee will move to cut the official Bank Rate from its current three point seven five per cent at its next meeting in March, following a narrow decision earlier in February to hold rates.
Markets are now pricing a high probability of a quarter percentage point reduction, reflecting confidence that price pressures are continuing their downward trajectory toward the central bank’s two per cent target.
The economic backdrop has also exhibited signs of weakening demand, with unemployment rising and wage growth slowing, factors that further support arguments for monetary easing.
Chancellor Rachel Reeves stressed that government measures to reduce living costs, including energy bill subsidies and freezes on rail and prescription fees, have contributed to the disinflationary trend, which she said vindicates policy efforts to ease the cost-of-living burden.
While some components of inflation remain more resilient, the broad-based decline in price growth has reshaped expectations around the timing of interest rate cuts, with analysts forecasting the first reduction as soon as March and potentially further easing later in 2026 as inflation continues to converge on the Bank’s target.
This marked slowdown was driven by declines in food, petrol and air fare prices, offering tangible relief to household budgets and aligning closely with market expectations.
Underlying inflation measures also softened, with core inflation dipping to around three point one per cent, while services price growth eased more modestly.
The data bolster growing anticipation among investors and economists that the Bank of England’s Monetary Policy Committee will move to cut the official Bank Rate from its current three point seven five per cent at its next meeting in March, following a narrow decision earlier in February to hold rates.
Markets are now pricing a high probability of a quarter percentage point reduction, reflecting confidence that price pressures are continuing their downward trajectory toward the central bank’s two per cent target.
The economic backdrop has also exhibited signs of weakening demand, with unemployment rising and wage growth slowing, factors that further support arguments for monetary easing.
Chancellor Rachel Reeves stressed that government measures to reduce living costs, including energy bill subsidies and freezes on rail and prescription fees, have contributed to the disinflationary trend, which she said vindicates policy efforts to ease the cost-of-living burden.
While some components of inflation remain more resilient, the broad-based decline in price growth has reshaped expectations around the timing of interest rate cuts, with analysts forecasting the first reduction as soon as March and potentially further easing later in 2026 as inflation continues to converge on the Bank’s target.
