Hope for further rate cuts as inflation stays steady at 2.5%

The headline rate of inflation remained stable at 2.5 per cent in March, the Office for National Statistics said yesterday, providing the Bank of England with welcome room for manoeuvre as it considers further interest rate cuts in the face of the credit crisis and the slowing global economy.

The ONS said small rises in prices in the furniture, household equipment and recreation sectors compared with last March had countered larger increases in the cost of transport and housing. As a result, the consumer price index (CPI) inflation, which the Bank targets, was unchanged compared with February.

Inflation as measured by the retail prices index fell to 3.8 per cent in March, from 4.1 per cent a month earlier, as mortgage borrowers' interest costs fell following the Bank of England base rate cut in February.

Economists were surprised by the stability of inflation, particularly following the latest data on factory gate prices, which the ONS said earlier this week were rising at the fastest rate for 17 years.

The figures suggest retailers have felt unable to pass on rising costs to consumers, whose household budgets are under pressure.

Jonathan Loynes, chief European economist at Capital Economics, said that the figures meant the Bank of England's Monetary Policy Committee would have more freedom to make further base rate cuts in addition to the three reductions announced since December, inflationary pressures remained.