UK inflation surprise: May 8 interest rate cut ‘sure bet’ but will mortgage costs now fall?

March’s bigger-than-anticipated fall in inflation paves the way for a further cut in interest rates despite fears of a spike this month as higher business costs and rising bills feed through.

Analysts now believe it’s an odds-on bet that the Bank of England will cut its base rate on May 8 when the central bank’s rate-setting monetary policy committee (MPC) next meets. That could be followed by a couple more rate cuts before the end of the year, providing relief for millions of borrowers, businesses and mortgage holders.

It comes after UK inflation slowed down for the second month in a row in March on the back of falling petrol prices. The Office for National Statistics (ONS) said the annual rate of consumer prices index (CPI) inflation eased to 2.6 per cent last month, from 2.8 per cent in February. That was a steeper drop than predicted by most economists, who had expected a reading of 2.7 per cent for March.

Policymakers are due to meet at the Bank of England, above, on May 8 but economic storm clouds have been gathering.

CPI peaked at 11.1 per cent in autumn 2022 and last month’s reading is the lowest since the end of 2024. Despite inflation remaining above the Bank of England’s long-term 2 per cent target and fears over pricing pressures from global trade tariffs, it seems likely that interest rates will be trimmed by a quarter point to 4.25 per cent at the May meeting.

Peter Stimson, head of product at MPowered Mortgages, said: “In an age of global uncertainty, sure bets are vanishingly rare. But today’s inflation data has created one - that the Bank of England will cut its base rate next month.

“With both headline and core CPI easing off in March, the Bank’s rate-setters no longer have a reason not to cut when they meet on May 8, and plenty of reasons to do so.

“However, May’s all-but-certain base rate cut is unlikely to translate into a further wave of mortgage rate cuts next month. The reason for this is that mortgage lenders price their fixed-rate loans according to swap rates, which are a forecast for the future course of the base rate, rather than the base rate of the day.

Higher household energy bills are likely to feed through into April's inflation figures.

“Swap rates have fallen since Donald Trump’s ‘Liberation Day’ tariff announcement two weeks ago, and many lenders have responded by cutting their mortgage rates accordingly. In other words, they have already ‘priced in’ a base rate cut in May and may not have scope to reduce their rates again so soon.”

Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, added: “The Trump tariff turmoil has already started feeding through into lower rates, as the mortgage market tends to move faster than savings.

“Moneyfacts figures show the average two-year deal is now 5.27 per cent - compared to a month ago when it was 5.33 per cent and a month earlier when it was 5.42 per cent. There are super-competitive deals around below 4 per cent now, which is a world away from the rates we’ve seen in recent years.”

The ONS said a drop in the price of computer games also contributed to March’s lower inflation reading. However, economists have predicted that inflation will shoot higher in April (those figures will be released after May’s rate-setting meeting) after a raft of consumer bill increases - such as energy, council tax and water prices - as well as the potential impact of higher taxes and labour costs for businesses, which are likely to pass some costs on to customers.

Motor fuel prices were 5.3 per cent lower in March, marking the biggest decline for four months.

Kevin Brown, savings specialist at Glasgow-based financial mutual Scottish Friendly, pointed to a temporary reprieve for households ahead of “awful April”.

He said a series of significant bill increases were feeding through this month alongside the introduction of national insurance hikes for businesses, which may have an “inflationary sting in the tail”.

Brown added: “While wage growth remains robust, a chunk of those wage rises looks set to be lost in higher household expenses. This is an uncertain moment - both for the UK economy and for household finances. The best way to feel less powerless in the face of rising bills is to build resilience into your finances.”

Suren Thiru, economics director at accountancy body ICAEW, described the latest inflation drop as “only a temporary reprieve” with an April surge looming.

He noted: “US tariffs have added notable complexity to the UK’s inflation outlook as, while costs for businesses may rise, prices for goods from countries such as China could fall as they seek to compete in alternative markets to the US.

“Though these figures will boost the case for a May interest rate cut, the monetary policy committee may want to get a better handle of the impact of this global financial volatility before triggering another policy loosening.”

The ONS’s preferred measure of inflation, consumer prices index including owner occupiers’ housing (CPIH), eased back to 3.4 per cent for March, from 3.7 per cent the previous month. Meanwhile, the retail prices index (RPI) measure of inflation declined to 3.2 per cent from 3.4 per cent.

Motor fuel prices were 5.3 per cent lower year on year in March, marking the biggest decline for four months. It was partly driven by a fall in the average price of petrol by 1.6p per litre between February and March to stand at 137.5p per litre. That was down from 144.8p per litre in March 2024.

National insurance nightmare: Why Scottish businesses think 2025 can only get worse