Good morning and welcome back to the City AM liveblog. Inflation has dropped to a year-low this morning, sparking renewed optimism that the Bank of England may soon cut interest rates to stimulate the economy.
Inflation Data Shows Significant Decline
New figures from the Office for National Statistics reveal that the Consumer Price Index (CPI), the primary measure of inflation, increased by three per cent in the year to January 2026. This marks a decrease from 3.4 per cent in December 2025, indicating a notable slowdown in price growth.
Key Drivers Behind the Drop
Grant Fitzner, chief economist at the ONS, attributed the decline to several factors. "Petrol prices and airfares have stabilised after a spike in December, contributing to the lower rate," he explained. "Additionally, reduced food prices, particularly for items like bread, meat, and cereals, played a crucial role. However, these gains were partially offset by higher costs for hotel stays and takeaways."
Labour Market Data Fuels Rate Cut Speculation
The inflation news follows Tuesday's jobs report, which showed unemployment rising to a post-pandemic high of 5.2 per cent. This has intensified expectations for a potential interest rate reduction in March, as policymakers aim to support economic activity amid weakening labour conditions.
Yael Selfin, chief economist at KPMG UK, commented, "The Bank of England may seek to minimise risks to the labour market by lowering rates ahead of the next forecast meeting in April." However, there could be disagreements within the Monetary Policy Committee (MPC), as Bank of England chief economist Huw Pill recently suggested that rates are already "a little bit too low."
Recent MPC Decision and Outlook
At its February meeting, the MPC voted 5-4 to maintain interest rates at 3.75 per cent, a closer decision than many anticipated. Despite voting to hold, Bank governor Andrew Bailey indicated a dovish stance, noting that the likelihood of further cuts would increase as inflation is projected to fall back to the two per cent target by Spring, earlier than the previous 2027 forecast.
Market and Economic Context
This development comes amid broader economic shifts, with City officials considering additional rate cuts to boost growth. The combination of falling inflation and rising unemployment presents a complex scenario for monetary policy, balancing price stability with employment support.
In related news, recent market movements include:
- Antofagasta's shares declining despite strong revenue figures.
- Debenhams shares plummeting after a £35 million capital raise confirmation.
- Lloyds selling Scottish Widows Europe in a £100 million deal.
- Defence stocks rallying following political commitments to increased spending.
Overall, the drop in inflation to a year-low signals potential relief for consumers and businesses, but the Bank of England's next moves will be closely watched as it navigates economic challenges ahead.
