UK Inflation Seen Holding At 3%, BoE Rate Outlook In Focus

Pound Sterling is trading slightly firmer against the euro and US dollar ahead of the upcoming UK inflation release, with investors assessing whether price pressures are easing quickly enough to allow the Bank of England to begin cutting interest rates later this year.

UK economists at Pantheon Macroeconomics predict headline CPI inflation to hold steady at 3.0% in February, broadly in line with the Bank of England’s latest projections.

Economists say offsetting forces likely kept inflation unchanged in February.

“We expect CPI inflation to be unchanged at 3.0% in February, matching the MPC’s forecast,” Pantheon economists said in a preview note.

According to the consultancy, stronger core goods inflation—particularly from clothing prices—and higher airfares likely balanced weaker price pressures elsewhere in the economy.

“Higher core goods inflation and airfares should offset weaker services and motor fuels,” Pantheon said, suggesting the headline figure will remain broadly stable despite shifts within the inflation basket.

Services inflation, a key focus for Bank of England policymakers, is expected to cool slightly, helped by falling hotel prices and lower recreation costs.

Pantheon highlighted accommodation and leisure prices as key drivers of the slowdown.

“Accommodation, catering and recreation services prices explain most of the slowdown we expect in services inflation,” the economists noted.

Hotel prices appear to have fallen during the month, partly due to changes in how the Office for National Statistics collects pricing data.

“Hotel prices likely fell in February, which trims services inflation compared with January,” Pantheon said.

Elsewhere, the consultancy expects some reversal in entertainment prices after sharp increases earlier in the year.

“Live music and theatre ticket prices surged in January, so we expect some payback in February,” the economists added.

Looking further ahead, Pantheon believes inflation has limited scope to fall sharply this year, particularly given ongoing geopolitical risks.

“Inflation has little further to fall this year,” the firm said, adding that global energy developments could influence the outlook.

In particular, rising geopolitical tensions in the Middle East represent a potential upside risk for prices if energy markets tighten further.

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Pantheon now expects UK inflation to peak around 3.3% later this year, before gradually easing again.

For the Bank of England, the near-term outlook remains complicated. While inflation is expected to decline slowly, it is still well above the central bank’s 2% target, meaning policymakers are likely to proceed cautiously when considering rate cuts.

Currency markets are therefore watching the upcoming CPI data closely. A higher-than-expected inflation reading could push back expectations for monetary easing and offer short-term support to the Pound, while a downside surprise might revive bets on earlier rate cuts.

For now, analysts say the February report is likely to show inflation stabilising rather than falling sharply, leaving the broader policy outlook largely unchanged.