UK Inflation Eases to 3.0% in January, Boosting Rate Cut Hopes

Britain’s annual inflation rate moderated in line with expectations in January, fresh official data showed on Wednesday, strengthening the case for a potential interest rate cut by the Bank of England next month.

The Consumer Prices Index fell to 3.0 per cent in January, down from 3.4 per cent in December, according to figures released by the Office for National Statistics.

“Inflation fell… to its lowest annual rate since March last year, driven partly by a decrease in petrol prices,” said Grant Fitzner, chief economist at the ONS.

The latest figures align with the Bank of England’s projection that inflation will continue to ease toward its two-per-cent target in the coming months, as declining energy bills help counterbalance rising water charges and other persistent cost pressures.

The BoE opted to hold its benchmark interest rate at 3.75 per cent earlier this month but indicated that further cuts remain on the horizon.

While private sector wage growth has shown signs of slowing, public sector pay continues to rise, official figures reveal. The UK unemployment rate currently stands at a five-year high of 5.2 per cent.

Prime Minister Keir Starmer’s Labour government has faced challenges in revitalising the country’s sluggish economic performance since its electoral victory in July 2024, having implemented tax increases across two annual budgets.

Responding to the inflation data, Finance Minister Rachel Reeves stated, “Thanks to the choices we made at the budget, we are bringing inflation down.”

Last week’s official figures indicated that Britain’s economy expanded less than anticipated during the final quarter of 2025. The Bank of England has subsequently revised downward its growth projections, now forecasting GDP growth of 0.9 per cent for this year and 1.5 per cent in 2027 reduced from previous estimates of 1.25 per cent and 1.6 per cent respectively.

Jonathan Raymond, an investment manager at Quilter Cheviot, commented: “As the economy barely kept afloat towards the end of last year, and the labour market and wage growth have cooled considerably, the Bank will likely feel increasingly comfortable cutting rates as 2026 progresses.”