Recent data shows that inflation pressures in the UK are continuing to ease, giving the Bank of England more flexibility in adjusting its current monetary policy.
In March, the UK’s Consumer Price Index (CPI) rose 2.6% year-over-year—below market expectations of 2.7% and down from 2.8% in February. Core inflation also fell to 3.4%, marking several consecutive months of decline, suggesting this is more than a temporary shift. In response, the Bank of England cut interest rates slightly in early May, bringing the benchmark rate down from 4.5% to 4.25%, signaling a potential shift toward further easing.
This moderation in inflation has been broad-based. Price increases in services like entertainment, transport, and hospitality have noticeably cooled. Fuel prices dropped 5.3% from a year ago, easing household cost pressures. Goods inflation rose just 0.6%, reflecting recovering supply chains and stabilizing global energy prices. Although energy prices spiked 6.4% in April due to a price cap adjustment, the central bank sees this as a short-term fluctuation and expects inflation to return to its 2% target by year-end.
On the growth side, UK GDP expanded by 0.7% in Q1 2025, slightly beating expectations. Strength in services and manufacturing helped offset concerns about the drag from high interest rates. However, the Bank cautioned that growth momentum may weaken in Q2 due to evolving U.S. trade policy and persistently high labor costs. It emphasized that interest rates remain in restrictive territory, and any future easing will be “gradual and cautious.”
Changes are also surfacing in the labor market. While nominal wage growth remains elevated at 5.9%, the number of job vacancies has fallen to 781,000—below pre-pandemic levels. The cooling demand for hiring is easing business cost pressures, lowering the risk of wage-driven inflation. Should this trend continue, the Bank will have more room to reduce rates further.
Looking ahead, global risks remain. The U.S.’s shift toward more protectionist trade policies could disrupt supply chains and affect import/export prices. This could further dampen inflation, but also usher in more volatility. Markets currently expect the Bank of England to cut rates two more times this year—potentially bringing the benchmark rate to 3.75% by year-end.
With a resilient economy, easing inflation, and a labor market that’s adjusting in a manageable way, the Bank now has more policy room to maneuver. Monetary policy in the UK may gradually shift from fighting inflation to gently supporting growth—a welcomed sign for market sentiment going forward.
