The British pound slipped below $1.29, hitting its lowest level in nearly two weeks, as traders reacted to a weaker-than-expected February inflation reading and the Spring Statement. The softer inflation print reinforced expectations that the Bank of England may adopt a more dovish stance in the coming months, potentially bringing forward interest rate cuts.
British pound weakens on inflation, spring budget
British Finance Minister Rachel Reeves said that UK inflation is now expected to average 3.2% in 2025, up from the 2.6% projected in October, according to the Office for Budget Responsibility (OBR). This upward revision raised concerns about the persistence of inflationary pressures, which could complicate the Bank of England’s policy decisions. At the same time, the OBR lowered its 2025 growth forecast to 1% from 2%, signaling weaker economic momentum ahead. The public sector net borrowing forecast was also updated, with borrowing expected to decline from £137.3 billion (4.8% of GDP) this year to £74.0 billion (2.1% of GDP) by 2029-30. However, compared to October estimates, borrowing for 2025-26 is expected to be £12.1 billion (0.4% of GDP) higher, highlighting ongoing fiscal challenges.
New Spring Statement announced
In an effort to balance economic growth and fiscal responsibility, the government announced several policy changes, including welfare reforms, reductions to departmental spending, and a small package of tax adjustments. While these measures were intended to support public finances, they failed to provide a significant boost to market sentiment, with investors largely underwhelmed by the statement’s lack of bold new initiatives.
The UK’s annual inflation rate eased to 2.8% in February, slightly below the forecasted 2.9% but in line with the Bank of England’s projections. The softer inflation reading contributed to the pound’s weakness, as it bolstered expectations that the central bank may begin cutting interest rates later this year. However, policymakers remain cautious, given the uncertain economic backdrop and the risk of inflation proving more stubborn than anticipated. In the currency markets, the pound's decline reflected growing investor uncertainty about the UK’s economic outlook, as traders weighed the implications of slowing growth, fiscal tightening, and the Bank of England’s next moves.
