The chances of a Bank of England interest rate cut next month have increased significantly after official figures showed UK inflation fell to 3% in January, its lowest point since March 2025.
The Office for National Statistics recorded the drop from 3.4% in December, with cheaper petrol, falling airfares and lower food costs among the main factors pulling the rate down. Economists now put the probability of a cut to the Bank’s key rate — currently sitting at 3.75% — at around 80% when policymakers meet in March.
Simon French, chief economist at Panmure Liberum, told the BBC’s Today programme that when the Bank last met, the vote to hold rates was so closely divided that only a small amount of additional evidence of slowing inflation would be needed to shift the outcome. KPMG’s chief economist Yael Selfin went further, predicting the Bank would cut rates three times across 2026, bringing them down to 3% by the year’s end.
The Institute for Chartered Accountants of England and Wales described January’s figures as a “decisive turn for the better,” though its economics director Suren Thiru noted that policymakers may want to wait until April rather than act in March, preferring to gather slightly more data before pulling the trigger.
Consumers are expected to receive further relief in the coming months. Energy forecaster Cornwall Insight predicted the government’s planned reduction in household energy bills from April would lower the typical energy price cap by £117 to £1,641. Combined with a slowdown in wage growth also reported this week, the overall picture points toward continued easing pressure on household budgets.
Retailers have played their own part in dampening prices. The British Retail Consortium pointed to heavy discounting during the January sales across clothing, footwear and furniture, alongside falling prices on staples including bread, cereals and rice. Its chief economist Harvir Dhillon attributed the trend to fierce competition between retailers absorbing rising costs to protect customers. However, the trade body cautioned that higher minimum wages, increased national insurance contributions and the forthcoming Employment Rights Act could make it harder for retailers to keep prices in check further down the line.
Not everyone is feeling the benefit equally. A London baker speaking to the BBC described how the cost of luxury chocolate had risen by £7 per kilo over the past 18 months, now costing her just under £20 per kilo. Rather than switch to cheaper alternatives, she has been absorbing the increase herself, squeezing her profit margins in the process.
It is worth noting that while inflation is falling, prices themselves are not going down — they are simply rising more slowly than before.
Chancellor Rachel Reeves welcomed the figures, calling cutting the cost of living her “number one priority” and pointing to the £150 energy bill reduction, a freeze on rail fares and frozen prescription charges as evidence of progress. The Conservatives disputed that framing, with Shadow Chancellor Sir Mel Stride arguing that inflation remains above the Bank of England’s 2% target “thanks to Labour’s choices,” and that families are still feeling financial strain as a result.
