UK CPI expected to soften in February, keeping pressure on BoE
- The United Kingdom’s Office for National Statistics will release the February CPI data on Wednesday.
- The annual UK headline and core CPI inflation are set to ease slightly in February.
- The UK CPI data could impact the direction of the Pound Sterling and the BoE’s interest rates.
The United Kingdom’s (UK) Office for National Statistics (ONS) will publish the highly anticipated Consumer Price Index (CPI) data for February on Wednesday at 07:00 GMT.
The Pound Sterling (GBP) could experience intense volatility following the UK CPI inflation report, as it is likely to alter the market’s expectations for the Bank of England’s (BoE) future interest rate cuts.
What to expect from the next UK inflation report?
The UK Consumer Price Index is expected to increase by 2.9% year-over-year (YoY) in February, following a 3% growth in January.
The reading is expected to remain distant from the BoE’s 2.0% target.
Core CPI inflation, which excludes energy, food, alcohol, and tobacco prices, is expected to be slightly lower at 3.6% (YoY) in February, down from January’s 3.7%.
According to a Bloomberg survey of economists, official data is expected to show that service inflation will likely ease to 4.9% in February after jumping to 5% in January.
Meanwhile, the British monthly CPI is expected to rise by 0.5% in the same period, compared to the previous decline of 0.1%.
Previewing the UK inflation data, TD Securities analysts noted: “Inflation is slated to cool slightly, with headline dropping to 2.8% (consensus: 2.9%; prior: 3.0%). We also expect core and services to come in lower, at 3.6% YoY (prior: 3.7% YoY and 4.9% YoY (prior: 5.0% YoY), respectively. While all these numbers are softer than in Jan, the deceleration remains too slow for the Monetary Policy Committee’s (MPC) preferences.”
How will the UK Consumer Price Index report affect GBP/USD?
At its monetary policy meeting earlier this month, the Bank of England (BoE) held interest rates at 4.5% on Thursday, warranting caution against expectations that they would cut rates over its next few meetings amid heightened uncertainty over the UK and global economies.
“However, the 8-1 vote split to stay on hold was a hawkish surprise and triggered an upward adjustment to UK rate expectations. The swaps market continues to price in 50 bps of easing over the next 12 months but has fully priced out any odds of an additional 25 bps cut following the less dovish MPC vote split,” BBH analysts noted.
Therefore, an upside surprise to the headline and core inflation data is needed to reaffirm the BoE’s prudent approach and increased bets for fewer rate cuts this year. In such a case, the Pound Sterling uptrend is expected to resume, lifting GBP/USD back toward the 1.3050 barrier. Conversely, softer-than-expected inflation readings will likely alleviate UK economic concerns, reviving expectations for aggressive BoE rate cuts and extending GBP/USD correction from four-month highs.
Any reaction to the UK inflation report is likely to be short-lived, given the upcoming British Spring Budget Statement, scheduled for later on Wednesday.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “GBP/USD is holding above all major daily Simple Moving Averages (SMA) heading into the UK CPI showdown, with the 14-day Relative Strength Index (RSI) momentum indicator in the daily chart holding firm above 50. The 50-day SMA and the 100-day SMA Bull Cross, confirmed on Monday, remains in play and acts as a tailwind for the pair.”
Dhwani adds: “However, the pair needs acceptance above the 1.3000 threshold to initiate a sustained uptrend toward the November 2024 high of 1.3048. The next relevant resistance is aligned at the 1.3100 round level. Alternatively, the immediate support is seen at the 21-day SMA at 1.2863, below which the critical 200-day SMA at 1.2800 will come into play. A sustained break below this level will intensify the selling pressure, potentially leading to a test of the 1.2750 psychological level.”
Economic Indicator
Consumer Price Index (YoY)
The United Kingdom (UK) Consumer Price Index (CPI), released by the Office for National Statistics on a monthly basis, is a measure of consumer price inflation – the rate at which the prices of goods and services bought by households rise or fall – produced to international standards. It is the inflation measure used in the government’s target. The YoY reading compares prices in the reference month to a year earlier. Generally, a high reading is seen as bullish for the Pound Sterling (GBP), while a low reading is seen as bearish.
Read more.Next release: Wed Mar 26, 2025 07:00
Frequency: Monthly
Consensus: 2.9%
Previous: 3%
Source: Office for National Statistics
The Bank of England is tasked with keeping inflation, as measured by the headline Consumer Price Index (CPI) at around 2%, giving the monthly release its importance. An increase in inflation implies a quicker and sooner increase of interest rates or the reduction of bond-buying by the BOE, which means squeezing the supply of pounds. Conversely, a drop in the pace of price rises indicates looser monetary policy. A higher-than-expected result tends to be GBP bullish.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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