UK Inflation Eases: Reprieve for Finance Minister Amidst Fiscal Challenges

UK inflation slowed more than expected in February, easing to 2.8% from 3.0%, giving temporary relief to finance minister Rachel Reeves ahead of a key fiscal statement. Despite cooling inflation, challenges remain with services prices staying high, and concerns over government bond yields and borrowing persist.

British government bond yields and the pound receded on Wednesday following data revealing a more significant slowdown in UK inflation for February than analysts anticipated.

The annual inflation rate dropped to 2.8%, down from January's 3.0%, slightly below expectations of 2.9%. While this development offers temporary relief for Finance Minister Rachel Reeves, analysts warn that energy costs and taxation could push inflation back up towards 4% by year-end. Investors in bond markets responded positively, with two-year gilt yields falling by 6 basis points to 4.243%.

Market reactions included an increase in bets for Bank of England rate cuts, with predictions of 45 basis points reductions this year, up from 40 basis points previously. Despite this, concerns about services prices, which held at 5%, linger. The British pound weakened against both the dollar and euro, reflecting a broader cautious economic sentiment.

(With inputs from agencies.)