UK inflation down to 3.2% – but what does it mean for interest rates? Analysis from across the industry

This morning, the Office for National Statistics has reported the latest UK CPI inflation data, showing that prices rose by 3.2% during the year to the end of March 2024, compared to 3.4% the previous month. Market predictions had been for a greater fall.

However, with inflation now at its lowest level since September 2021, but still some way above the Bank of England’s 2% target, what might it mean for the next interest rate decision due in May? The BoE will be looking closely at these data, that’s for sure.

The ONS reported that food prices had been softening, referencing chocolate biscuits and crumpets in particular. They said that the largest downward contribution to the monthly change in both CPIH and CPI annual rates came from food, with prices rising by less than a year ago, while the largest, partially offsetting, upward contribution came from motor fuels, with prices rising this year but falling a year ago.

But what has the industry been saying in reaction to today’s inflation news? What does it say about the timing of interest rate cuts? What might it mean for mortgages and the property market? We’ve compiled some of the reactions to today’s news as follows:

Commenting on today’s inflation data, Peder Beck-Friis, Economist, PIMCO, said: “Inflation surprised slightly to the upside in March, falling less than expected, though possibly in part distorted by the early timing of Easter. While the trend remains down, the pace of deceleration has slowed in recent months, with sequential inflation having stabilized at ~3% (annualised) in recent months.

“Following Powell’s comments yesterday, we don’t think a more hawkish Fed alone will meaningfully change the Bank of England’s (BoE) outlook. The BoE can – and will – diverge if domestic conditions warrant it. Granted, the reacceleration of U.S. inflation could be an early sign that similar dynamics could play out in the UK, too. But at this point in time, that is not our view. We still see the fundamentally different drivers between the UK and U.S. – growth in the UK is below trend, unlike in the U.S.; fiscal policy is tight in the UK, but not in the U.S. Consequently, we expect a gradual decline in UK inflation going forward.

“We still think a mid-year rate cut is reasonable. However, this week’s data – showing slightly stronger wage growth and slightly higher inflation, combined with the reacceleration of U.S. inflation, is likely to reduce some of the pressure (and urgency) for some MPC members to vote for near-term rate cuts. As such, the risks of a later start to cuts have increased a bit. We maintain our view that UK gilts look attractive relative to U.S. Treasuries.

Andrew Oxlade, investment director, Fidelity International, said: “The March Consumer Prices Index figure of 3.2% was down from 3.4% in February – a relief for the Bank of England but slightly less than the 3.1% analysts had hoped.

“The broad picture is positive. The headline CPI figure has been regularly falling and is a fraction of its painful peak of 11.1% in 2022. But falls in late 2023 have largely been incremental and slower than hoped – a reminder that when fighting inflation, the last part is the hard part. 

“All the time the figure hovers so far above the target of 2%, policymakers will find it hard to justify cutting rates. The shift in rate expectations reflects this. In January, markets had expected six rate cuts in 2024 and that the first would have happened by now. Predictions today point to only two cuts, from 5.25% to 4.75 with the first not arriving until autumn.

“The good news is that shoppers should be seeing slower rises and may soon begin to notice some prices falling, at least in pockets. The price of furniture, for example, in March was 2.3% lower than a year before. More broadly, the picture is that inflation in services remains much higher than goods – 6% versus 0.8%.

“Attention will now turn to the impact of rising oil prices, driven higher by the crisis in the Middle East. It could further slow reductions in inflation, and further push out hopes of rate cuts even if they are much needed by a weak British economy.”

Danni Hewson, head of financial analysis at AJ Bell, said:

“Inflation is moving in the right direction and anyone who has wheeled a trolly around a supermarket over the past few weeks will have noticed that prices aren’t delivering those checkout shocks in the same way they were this time last year.

“Next month should look even better as the falling energy price cap is finally counted in the numbers, even if many households won’t have noticed much difference to their outgoings as their direct debits remain elevated to pay off outstanding balances.

“But even in this set of figures there are a few troubling issues, notably the stickiness of service sector inflation. This could be exacerbated by the increase in the National Living Wage which is putting pressure on many businesses to hike prices again to balance their books.

“We know stuff is costing less as the impact of all that post-pandemic supply chain disruption washes through the numbers. Just compare goods inflation of 0.8% with the 12.8% we were facing only twelve months ago. But the oil price is still hovering perilously close to $90 a barrel and even many school kids now understand how the fluctuating price impacts more than just motorists.

“This print is unlikely to persuade Bank of England policy makers, who just a couple of months ago were voting for further hikes, that the time is now right to start to cut. Andrew Bailey might be making positive noises about the pieces of the economic puzzle falling into place for a change in policy, but markets are far from convinced.

“Looking at the numbers after the inflation print was released, expectation of a June cut has fallen back significantly and more than 50% now think even August will be too soon.”

Commenting on the data, Tomasz Wieladek, chief European economist at T. Rowe Price, said:

“UK CPI inflation fell to 3.2% in March from 3.4% in February, with core inflation dropping to 4.2% from 4.5%, and CPIH inflation held steady at 3.8%. However, services inflation remained relatively sticky, falling to only 6% from 6.1%. This relatively strong reading for services inflation was higher than consensus expectations of 5.8%.

“These numbers are not easy to interpret, as a result of the early timing of Easter this year. Nevertheless, even accounting for Easter effects, it suggests underlying domestically generated inflation in the UK is significantly stronger than expected.

“Together with the rising momentum in wage inflation, the sticky services inflation numbers raise the risk the UK inflation battle is far from over and perhaps not yet won. The MPC will be worried about this scenario, and I believe this strong reading will make the MPC cautious about cutting early in the summer. Indeed, given these strong domestic inflationary pressures in both wages and services, the MPC will now likely wait until late summer to get the required confidence to cut rates.

“However, there is another risk that is not yet spoken about in the UK monetary policy debate. If services inflation and wages continue to remain persistently at these high levels, the risk the Bank of England will have to hike this year is rising. After all, the Bank of England is data-dependent. If the data continue to indicate policy is not tight enough to bring inflation back to target, the MPC may have to tighten policy further.”

Lindsay James, investment strategist at Quilter Investors said: “UK inflation has fallen to 3.2%, slightly less than forecasted, down from 3.4% in February, in a data release that will be reassuring to the Bank of England and leaves rate cuts on the table in the near term. Last month saw a slightly faster than expected decline which initially drove gilt yields lower, however since then we have seen continued signs of a strong US economy along with higher than expected US CPI – which has pushed back expectations of rate cuts in the US and in the UK too, with the markets expectation that the BoE will be reluctant to move in a different direction from the Federal Reserve, due to the risk of devaluing the pound and hence triggering a further inflationary pulse.

“This effect has seen the market price in less than two rate cuts in the UK by year end, approximately one fewer than a month ago despite the improving inflation data. This latest inflation number may question this as the Government heads into the election banking on interest rate cuts feeding through to the real economy.

“With a slightly weak UK labour market report out earlier this week, showing unemployment has ticked up from 3.9% to 4.2% even as wage inflation continues to run hot, this is one signal that tight monetary policy is having an economic impact. However, with oil prices up around 16% since the start of the year, as tensions continue in the Middle East, investors will need to weigh the wider global picture rather than extrapolating policy from CPI data alone.

“Whilst rate cuts may therefore still be a little further away than investors expected at the start of the year, reassuring levels of global growth and broadly declining inflationary forces should ultimately dominate the market direction in months to come.”

Rob Clarry, Investment Strategist at wealth manager Evelyn Partners, comments:

“The services component of CPI inflation remains elevated at an annual 6.0%, which was above the 5.8% expected – and the Bank of England will want to see more progress on this measure before they commit to a rate cutting cycle.

“Despite softer domestic conditions, the Bank’s monetary policy committee will be wary about cutting in the face of higher US interest rates. As a smaller but open economy, the UK is exposed broader global economic forces, and this has been on display in recent weeks as US bonds yields have risen amidst sticky inflation, which has placed upward pressure on UK government bond yields.

“Cutting interest rates in this environment would likely lead to sterling deprecation, which would, in turn, lead to higher import prices and put upward pressure on UK inflation. As we enter the summer months, the Bank will continue to face a difficult balancing act between growth on one side and inflation on the other.

“The largest downward contribution to the monthly change in inflation came from food, with prices rising by less than a year ago, while the largest upward contribution came from motor fuels, with prices rising this year but falling a year ago.

“But there are signs that domestic conditions will favour easier monetary policy in the coming quarters. February’s labour market data showed a marked weakening, with a 156,000 contraction in employment, which was well below the expectation of a 58,000 increase. The unemployment rate also rose from 3.9% to 4.2%.    

“On the growth side, the data are showing signs that activity has improved in recent months, but from a low base. The UK composite PMI reading for March was 52.8, marking the third month in a row above 50 (50 signals expansion vs the previous month). This implies that the technical recession experienced in the second half of 2023 is now over. However, growth is likely to remain sluggish through the remainder of this year, particularly given labour market weakness. 

“The recent run of data has changed the calculus for money market traders: the probability of a June rate cut has fallen from 70% last month to around 20% today. Post this CPI report, sterling gained vs the US dollar and gilt yields increased across the curve.

“We continue to expect the first rate cut around the middle of the year, although rising US bonds yields are challenging this view.”

Abhi Chatterjee, Chief Investment Strategist at Dynamic Planner said: “In more good news for the UK consumer, inflation (as measured by the CPI) rose by 3.2% in March 2024, down from 3.4% in February 2024. Lower food prices were the largest contributor to the reduction in inflation, being partially offset by rising motor fuel prices, which is understandable with the geopolitical situation in the Middle East.  While this has been welcomed by most as an indication that the economy is turning the corner, the fall in inflation was lower than expected. This should temper expectations of speedy rate cuts by the Bank of England, as the last mile to the inflation target of 2% seems to be the longest.

“The lower-than-expected drop in service inflation of 6% implies that the slower increase in costs as reflected by the CPI is not seeping into the economy. With wage growth remaining high, increased unemployment and stagnating GDP is sending mixed signals to the powers that be. While the electorate would like more money in their pockets through lower interest rates and tax cuts, such immediate actions would not be in the long-term interest or achievable without a significant boost to productivity and growth in the UK.”

Mike Stimpson, Partner at Saltus said, “Today’s drop in inflation will be welcome news to many people up and down the country as cost of living pressures continue to ease. But despite the decline in inflation we’ve seen over the past few months, our latest research has found that nearly a third (28%) of high net worth individuals (HNWIs) still identify inflation as a top risk to their wealth.

“For many HNWIs inflation has been a top concern, regardless of its fluctuations, as those worried about the impact of inflation has remained relatively stable, and has been considered the biggest risk to wealth in the last two rounds of our research.

“However, we know that even among HNWIs, economic concerns, including inflation, are felt differently across different groups. Those over 55 were 70% more likely to list inflation as one of the biggest risks to their wealth than those who are younger. This may be because the older group are more likely to be focused on the real income their wealth can generate as they approach retirement, or because only this group have experienced the impact of persistent levels of significant inflation during recent years.

“Although we won’t know until next month what impact this drop will have on interest rates, many will now be hopeful to see the base rate cut further, in what would be further welcome news for homeowners and borrowers alike.”

Karen Barrett, CEO and Founder of Unbiased, said: “While we’re closer to the elusive 2% target, we are not out of the woods yet. After all, prices are still actively rising – just at a slightly slower rate than before – and there’s no guarantee they’ll start falling anytime soon.

“One of the most disappointing aspects of how long this has gone on for is not just the Bank of England’s repeated shortcomings, but also the government’s lack of action to help people struggling with higher costs, especially soaring mortgage rates.

“Widespread policy changes aren’t necessarily the answer, but rather improved financial education – whether at schools, in the workplace, or for those facing life-changing decisions.

“We overlook the value of financial knowledge and confidence all too easily, even though a lack of it can be costly to the tune of £65,000, according to Moneybox research.

“If more people make confident financial decisions, it could potentially add £2 trillion of spending power to the UK economy, so the government’s complacency is not just galling but imprudent.

“And financial education doesn’t have to be tedious or overly complex. There are easy ways to get started with managing your money that aren’t overwhelming.”

Kirsty Watson, chief operating officer at abrdn adviser, said: “Inflation continues to slow towards the two per cent target. But a smooth path towards that isn’t guaranteed. As we saw in the US inflation data last week, there may still be unexpected jumps amid what remain volatile economic conditions.

“That being said, the two per cent target is still widely expected to be reached this year. And this will be an important moment for the advice sector. That’s because while a positive, there’s a real risk that some people either assume that inflation is now something they don’t need to worry about anymore, or that conditions will – or should – go back to how they were before.

“Neither of these will be the case, given that we are all still living with higher prices than we were in the not-too-distant past. Many people will naturally have switched to a short-term, reactive thinking as the cost-of-living crisis hit. Advisers now have a real opportunity to help them back to taking a long-term view that reflects the realities of our new normal. We can’t let savers be lulled into inaction. If this happens, more and more could end up falling short of their plans or find themselves caught out by unexpected future shocks – undoing all the progress that’s been made to date in helping more people unlock good outcomes through better, futureproofed financial plans.”

Giving his views on what it might mean for mortgages, Peter Stimson, Head of Product at the mortgage lender MPowered, commented:

“The Bank of England’s battle against inflation is far from over – and this is bad news for both the property and mortgage markets.

“While CPI continues to head in the right direction, it is still well above the Bank’s 2% target. With the economy returning to growth in January and February, the Bank will now be in no hurry to start reducing interest rates.

“GDP growth may be anaemic but it’s likely to be just enough to convince the Bank to continue administering its bitter monetary policy medicine.

“That’s why the swaps market – which mortgage lenders use to set the interest rates they offer to borrowers – increasingly suggests that a cut in Base Rate could still be several months off.

“Many lenders had been hoping for a first Base Rate cut in June, with more to follow in the second half of the year. While rate cuts for 2024 are still likely, for now the waiting game looks set to continue a little longer.

“This is cold comfort to the estimated 1.6 million mortgage borrowers whose existing fixed rate deals are due to end this year. All of them are still likely to face a painful jump in their monthly repayments if they move onto a higher interest rate.

“And while net levels of mortgage lending increased sharply during the first months of 2024, helping to reinvigorate the slumbering property market, that progress may now be halted.”

Also commenting on what the inflation news might mean for mortgage markets, Paresh Raja, CEO of Market Financial Solutions, said: “Inflation remains above the Bank of England’s target of 2%, delaying an eagerly awaited rate cut for another couple of months at least. The over-riding sense is that the base rate will be cut in June, although all eyes are on the US Fed, with the Bank of England unlikely to act until cuts are made ‘across the pond’. Nevertheless, we are seeing that buyers, investors, brokers, and lenders within the UK property market are all gearing up for a more accommodative monetary policy environment.

“Lenders are constantly adapting their products in line with the economic outlook. Meanwhile, recent data unveils a significant uptick in mortgage approvals, accompanied by an upward trajectory in wages. In combination, these factors mean that prices are expected to continue to rise at the steady rate we have seen so far in 2024, and analysts predict that a stabilisation or slight uptick in prices by year-end as the market begins to benefit buyers to a greater extent than sellers.

“This outlook is positive, but the economic environment remains challenging. Today’s inflation data will continue to imbue the property market with a growing sense of confidence as the economic horizon brightens.”

Simon Webb, managing director of capital markets and LiveMore, commented:

“At 3.2%, we are continuing the mainly downward trajectory of inflation rates that we have witnessed since the peak in October 2022.]

“Imagine a bell curve. At 3.2%, March 2024’s inflation rate is around the same levels as Autumn 2021 when the rate of inflation rose from 3.1% in September to 4.2% in October. The difference is that those inflation figures were the beginnings of a sharp increase in inflation rates all the way up to the October 2022 summit of 11.1%.

“Although our current inflation rate remains way off the 2% goal, consumers can take some solace that inflation is largely on the descent this time round, and our economy does appear to be on the mend, slow though that process may be.

“Older borrowers and mortgage prisoners are continuing to feel the squeeze with the continuing high cost of living. People coming off an interest-only mortgage this side of summer will need to make sure they seek sound advice.”

Commenting on falling inflation painting a positive domestic picture but shaky times ahead with global market uncertainty, Daniel Austin, CEO and co-founder at ASK Partners, said: “Decreasing inflation suggests that the Bank of England is likely to maintain interest rates for an extended period, particularly considering the signs of economic recovery we’ve witnessed. This all points to a positive domestic story of an economy exiting a mild recession but does mean that pressure will remain on those servicing debt and with ongoing global market uncertainty surrounding the Middle East crisis, the coming months are set to be shaky.

“In the real estate sector and as property loan extensions expire, borrowers will face the choice of injecting fresh capital, returning assets to lenders, or selling in a soft market. The assets hitting the market will kickstart the cycle and offer opportunities for capital-endowed buyers, who view this as an opportune moment to acquire assets at significant discounts.”