Hopes of a cut in the cost of borrowing before the summer were given a boost today with official figures showing inflation fell below the Bank of England’s 2.0 per cent target in January.

National Statistics reported that the Consumer Prices Index (CPI) – the Government’s preferred measure of inflation – fell to 1.9 per cent in the year to January, down from a high of 2.5 per cent in September and lower than analysts’ expectations. Importantly core inflation, which excludes energy, food, alcohol and tobacco, remained unchanged at just 1.3 per cent.

The statistics office also revised December’s CPI index down from 2.0 to 1.9 per cent, meaning inflation has now been below target for two months in a row.

The figures sent sterling lower on the foreign exchanges with traders speculating that the Bank of England would move to cut interest rates possibly as soon as next month.

The Bank’s rate-setting Monetary Policy Committee (MPC) has kept the cost of borrowing unchanged at 4.5 per cent since August's quarter point cut, despite five consecutive quarters of below-trend growth, because of a fear that a year of soaring fuel costs might trigger an inflationary spiral with wages and prices both rising.

Daragh Maher, an analyst at Calyon, said the MPC probably had a preview of today’s data at last week’s rate-setting meeting, lending "greater credence" to unsubstantiated reports that the vote was just 5-4 in favour of no change.

"In any event, today’s release will foster expectations that the hawks will eventually have to cave in to the disappointments on growth and the lack of evidence of any lasting inflationary impulse," he said.

The markets are now looking to the publication tomorrow of the Bank’s quarterly Inflation Report for further clues on the prospects for rates.

Analysts said a dovish report and some soft retail sales figures on Thursday would increase the probability of a cut in borrowing costs either next month or soon after.

"The MPC were keen to use rising inflation in the November Inflation Report as an indication of a lack of spare capacity in the economy," John Butler, chief UK economist at HSBC, said. "That argument looks far less convincing now, indeed, the slowdown in inflation seems to suggest the opposite that during the past year there has been an increase in spare capacity," he added.

"The key is that although fuel prices are rising, there has been little evidence in either the CPI or average earnings data of any second round effects.

"Although the renewed rise in oil and gas prices may raise the near-term profile for inflation, the argument for seeing this as a squeeze on profits, income and GDP has become far more convincing."

The statistics office attributed last month’s fall in inflation to lower furniture prices and cheaper financial services. Further downward pressure came from recreation and culture, in particular games, toys and hobbies. The price of vegetables, clothing and footwear also fell. The biggest upward pressure on prices came from higher transport costs, a direct result of higher fuel prices.

The wider RPI measure of inflation rose 0.2 per cent to 2.4 per cent, reflecting different weights on some components of the index compared to CPI.

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