The UK inflation rate decreased unexpectedly to 2.6% in March, prompting considerations for the Bank of England to reduce interest rates in response to the economic impacts of US President Donald Trump’s tariffs. The Office for National Statistics reported this annual consumer price increase on Wednesday, which was below the anticipated 2.7% forecast by economists polled by Reuters and a decrease from February’s 2.8%.
The decline was largely attributed to lower prices in petrol, games, toys, and hobbies, particularly computer games. Nonetheless, services inflation, a crucial indicator of underlying price pressures for policymakers, also declined more than anticipated, dropping to 4.7% in March from February’s 5%. Additionally, food inflation eased from 3.3% to 3%.
Tomasz Wieladek, chief European economist at T Rowe Price, noted that the reduction in services inflation would bolster the Bank of England’s confidence in the disinflation process in the UK and likely lead to a rate cut in May. Following the data release, market traders solidified their expectations of at least three quarter-point rate cuts from the Bank by the end of the year, with a 85% probability of an initial rate cut at the May meeting, as implied by swaps markets.
The yield on two-year gilts, which are influenced by interest rate expectations, decreased by 0.06 percentage points to 3.91%. The British pound initially dipped against the dollar following the data but later recovered, rising 0.3% to $1.328 for the day. Wieladek also suggested that the softer inflation data and trade concerns signaled the possibility of “at least four” rate cuts this year.
Chancellor Rachel Reeves stated that two consecutive months of declining inflation, coupled with GDP and real wage growth, were “encouraging signs,” countering claims from shadow chancellor Mel Stride that government policies were maintaining higher inflation levels. However, economists warned that inflation might rebound in April due to sharp increases in regulated household bills, with long-term predictions hinging on global trade policy changes.
James Smith, research director at the Resolution Foundation think-tank, emphasized that the outlook for UK inflation largely depends on President Trump’s tariff strategies. The Bank of England has been weighing the risks of a weakening job market against the pressures from solid wage growth and rising household costs. The Bank’s Monetary Policy Committee, committed to a “careful and gradual” approach, maintained interest rates at 4.5% last month.
The prospect of a global trade war is now a significant consideration for the Bank of England. The UK has been affected by President Trump’s broad 10% tariff and a 25% levy on imported cars and steel. Economists suggest that slower global growth and the unpredictable effects of trade diversion will have a more substantial impact on the UK economy. Clare Lombardelli, a deputy governor at the Bank of England, recently stated that tariffs might suppress economic activity, although predicting their effect on inflation remains challenging.
Smith added that global trade uncertainty could lead to lower prices, noting that oil prices have dropped more than 10% since early April, though a global trade war might reignite inflation. Ruth Gregory, deputy chief UK economist at Capital Economics, indicated that the tariff shock has shifted the risk balance towards lower inflation and more rapid interest rate reductions.