LONDON (MktNews) - The softer-than-expected UK inflation data for January have raised expectations that the next reduction in interest rates could come earlier than previously thought, analysts said Tuesday, although they are still predicting the next bout of easing will come at the end of the second quarter.
The annual rate of underlying RPIX inflation dropped to 1.8% in January from 2.0% in the previous month. Markets had been expecting the rate to stay steady at 2.0%.d lrf,ht cybpbkcz lj +1.8% u/u
Jeremy Hawkins, UK economist at BankAmerica, said the data "increases expectations of a rate cut sooner rather than later", especially if the February RPIX number turns out soft again as well.
Hawkins also noted that service sector inflation eased in January, to an annual rate of 2.9% from 3.2% in December.
Philip Shaw, chief economist at Investec, struck a similar note. He argued that if there is a further reduction in RPIX inflation in February, "one would guess that would be below what the BOE is expecting and it could well trigger an earlier reduction in interest rates."
But for the moment, many analysts are still expecting the next rate cut towards the end of the second quarter, probably in June.
There are also some doubts as to whether RPIX inflation will indeed soften further in February as energy costs probably increased again after OPEC cut oil output. Nevertheless, analysts said there is certainly the possibility that RPIX inflation could go below 1.5% in coming months, a level which would prompt an explanatory letter by the Bank of England to the Chancellor.