The UK’s inflation rate has dropped to 3%, its lowest level since March last year, renewing expectations that the Bank of England (BoE) may soon begin cutting interest rates.
The fall, recorded in January, marks a clear reversal from December’s unexpected uptick to 3.4% and reinforces the broader downward trend seen in late 2025.
Economists note that easing petrol, food, and airfare prices have been key contributors to the decline, helping inflation move closer to the government’s 2% target.
Bank of England easier decision
The BoE has held Bank Rate at 3.75% in recent meetings, emphasising the need for confidence that inflation will not only reach 2% but remain there sustainably.
However, with inflation now falling faster than previously forecast, policymakers appear to have greater room to consider loosening monetary policy later this spring.
The Bank itself has acknowledged that inflation is likely to return to target ‘a bit quicker than previously forecast’, suggesting scope for cuts if economic conditions evolve as expected.
Rate reduction likely in March or April 2026
Market analysts increasingly anticipate a rate reduction as early as March or April, particularly as wage growth cools and unemployment edges higher—factors that reduce domestic inflationary pressure.
For households and businesses, a cut would offer welcome relief after two years of elevated borrowing costs, potentially lowering mortgage rates and improving credit conditions.
While the BoE remains cautious, the latest inflation figures strengthen the case for a shift towards easing—signalling that the long, difficult climb down from the inflation peak may finally be nearing its conclusion.
As expected
Most economists and market analysts expected UK inflation to fall back to around 3% in the January release, down from 3.4% in December 2025.
This means the actual figure—3%—came in exactly in line with forecasts, rather than surprising to the downside or upside.
That alignment matters for the Bank of England because it reinforces the sense that inflation is easing broadly as expected, rather than stalling or re‑accelerating.
Employment data
Alongside falling inflation, the Bank of England is closely watching UK labour market data, which remains a key factor in its interest rate decisions.
Recent figures show wage growth is easing, with average earnings excluding bonuses rising at a slower pace—now below 6%—while job vacancies continue to decline.
This softening suggests that domestic inflationary pressure from pay settlements may be waning, giving the Bank more confidence that inflation can return to target sustainably.
However, unemployment remains low, and services inflation is still sticky, meaning policymakers are likely to weigh jobs data carefully before committing to rate cuts.
If wage growth continues to moderate and employment weakens further, the case for easing monetary policy will strengthen.