No Rate Cut Expected at Tomorrow’s MPC Meeting

Main points

• Annual consumer price inflation was 3.4 per cent in February, falling from 4.0 per cent in January. This figure reflects upward contributions, such as those from housing and household services, and motor fuels, being offset by downward contributions, such as in in food and alcoholic beverages
• This fall in the annual CPI inflation rate was expected, given base effects from the large energy price increases observed in early 2023. However, today’s figure is higher than projected in my colleague Huw Dixon’s blog last month, indicating that month-on-month inflation was actually higher than expected. While inflation is set to fall throughout the remainder of the first half of 2024 due to base effects, it will be important to keep an eye on month-on-month figures to determine to what extent we will see inflation rebound in the second half of 2024. Still, we expect these upcoming falls to enable the MPC start cutting interest rates soon
• While indicators of underlying inflationary pressures all fell on the month, they remain high, which may require the MPC to exercise caution in such monetary loosening. NIESR’s measure of underlying inflation, which excludes 5 per cent of the highest and lowest price changes to eliminate volatility and separate the signal from the ‘noise’, fell to 3.9 per cent in February from 4.9 per cent in January; core CPI fell to 4.5 per cent from 5.1 per cent; and services inflation fell to 6.1 per cent from 6.5 per cent. These measures indicate that underlying inflationary pressures remain elevated – and well above the 2 per cent target. As a result, we expect the BoE to keep interest rates unchanged in the upcoming MPC meeting this week

“Annual CPI inflation was 3.4 per cent in February, falling from 4.0 per cent in January, driven by downward contributions from food and alcoholic beverages. This figure represents the lowest annual CPI inflation figure since September 2021 and possibly signals that the MPC can start to cut interest rates in the coming months – though we don’t expect any change at tomorrow’s meeting.”

Paula Bejarano Carbo
Economist, NIESR

For a breakdown of what inflation is and how it is calculated, read our blog post here.