BoE's 2% inflation target 'within touching distance' amid now 'inevitable' March rate cut

The Pound sank to its lowest level in more than three weeks against the dollar on Tuesday, as another thoroughly disappointing UK labour report added to fears over the health of Britain’s economy. The unemployment rate continues to climb, unexpectedly edging up to a post-COVID-19 high of 5.2% in the three months to December, and a near decade high once the pandemic period is excluded. Wage growth has eased, falling to an annual pace of 4.2% both including and excluding bonuses. The more timely data for January wasn’t any better, with another 11k employees shed from the payroll at the start of the year according to HMRC - the fifth straight month of losses.

Recent economic figures are both making it ever harder for the Labour government to claim that its economic strategy is working, and, making it increasingly likely that the Bank of England will slash rates again at its next meeting in March.

It seems inevitable now that the pendulum will swing in support of a cut next month, as it would only take Governor Bailey himself to shift his vote for the doves to get their way.

This morning’s UK inflation report has sealed the deal in our minds. As expected, the main inflation measure eased to its lowest level in almost a year in January, and with household energy costs set to fall further in the coming months, the Bank of England’s elusive 2% inflation target may soon be within touching distance.

The rising likelihood of additional MPC cuts, combined with the fragile state of Prime Minister Starmer’s leadership, means that the path of least resistance for sterling is probably lower in the near-term.