UK Inflation Expectations Ease in February, Boosting Rate Cut Hopes

Public expectations for inflation in the United Kingdom fell notably in February, according to the latest Citi and YouGov survey, offering potential relief to policymakers at the Bank of England as they weigh the timing of future interest rate cuts.

The monthly survey showed that short term inflation expectations for the year ahead declined to 3.3 percent in February, down from 3.8 percent in January. Longer term expectations, which reflect views over a five to ten year horizon, also dropped to 3.6 percent from 4.1 percent in the previous month.

The decline suggests that households may be gaining confidence that price pressures are gradually coming under control after a prolonged period of elevated inflation. For the Bank of England, managing expectations is a crucial part of maintaining price stability, as persistent fears of high inflation can influence wage demands and spending behaviour.

Citi described the latest reading as clearly supportive of a more dovish stance on interest rates. In an accompanying note, the bank said that despite volatility in recent months, the February shift could represent a more sustained change in public sentiment rather than a temporary fluctuation.

The data comes at a pivotal moment for monetary policy. Bank of England Governor Andrew Bailey recently indicated that a rate cut in March remains possible, though he emphasised that further evidence would be needed before taking that step. At the most recent meeting, the Monetary Policy Committee voted by a narrow majority to keep borrowing costs unchanged.

While headline inflation has fallen from its recent peaks, services inflation has remained more stubborn, complicating the outlook for policymakers. The Bank is particularly attentive to domestically driven price pressures, including wages and service sector costs, which can prove more persistent than energy or goods related inflation.

Market participants are closely monitoring consumer expectations because they can shape future inflation dynamics. If households anticipate lower inflation, they may moderate wage negotiations and spending patterns, reducing the risk of a wage price spiral. Conversely, entrenched high expectations could make it harder for the central bank to meet its 2 percent target.

Financial markets reacted cautiously to the survey results, with analysts noting that while the decline is encouraging, it represents only one data point in a broader economic picture. Upcoming official inflation figures and wage growth data will likely carry greater weight in shaping the Bank’s decision at its next policy announcement scheduled for March 19.

As Britain continues to navigate the aftermath of recent economic shocks and cost of living pressures, the easing in inflation expectations provides a tentative signal that confidence may be stabilising, even as policymakers remain vigilant about lingering price risks.