Interest rate cut even more likely next month as inflation falls

The rate at which prices are increasing has fallen significantly, official figures have shown, making an interest rate cut next month even more likely.

Data from the Office for National Statistics says the consumer price index (CPI) measure of inflation dropped to 3% in the year to January. Not since March last year has inflation been this low.

Money blog: Big drop in inflation announced - follow live It means things are still becoming more expensive, just at a slower pace than before. But it also increases the odds of an interest rate cut in March.

Now, traders think there's an 81% chance of a drop to 3.5% next month. A second cut, bringing interest rates to 3.25%, is anticipated in September.

The pace at which prices are rising is closely watched by the interest-rate setters at the Bank of England. Even before today's inflation data release, traders were betting on a cut after jobs data on Tuesday showed employment was at a near five-year high and wasge increases were falling.

The Bank adjusts the interest rate based on how close the UK is to its 2% inflation target. That base interest rate affects how much you get for your savings, how high your mortgage rate is, and how expensive it is to pay back some student loans.

When will the next interest rate cut be? Not everyone thinks a March rate cut is a given. Big Four accounting company PWC said it's "not guaranteed".

A spring interest rate cut is seen as a given according to the Institute of Chartered Accountants in England and Wales (ICAEW) though "a lingering question" is whether to go in March or April. How many cuts? And the idea of a second cut at all is "far from certain" due to stubbornly high inflation in the biggest part of the UK economy, according to economic research firm Pantheon Macroeconomics.

While services inflation slowed to 4.4%, it was less of a slowdown than the Bank and economists polled by Reuters had forecast. A third interest rate cut, however, is being considered by Big Four accounting firm KPMG and tax consultants RSM, though that would only happen if the jobs market worsens.

KPMG reckon the interest rate will be at 3% by the end of the year. "A third rate cut is a downside risk rather than the base case at the moment.