British inflation unexpectedly slowed in March to reach the lowest level in a year, data showed Wednesday, undermining the urgency of raising interest rates although analysts said a hike was still likely next month.
The pound slumped following news that the Consumer Prices Index 12-month rate dropped to 2.5 percent in March as the official data throws into doubt the course of the Bank of England's monetary policy this year.
Analysts' consensus forecast had been for the annual inflation rate to remain at 2.7 percent last month, while the Office for National Statistics said this was undone by prices for clothing rising by less than one year earlier.
"Sterling fell sharply on the news, losing more than half a cent against the dollar," said Ben Brettell, senior economist at Hargreaves Lansdown.
"Traders had been betting on an interest rate rise next month from the Bank of England, and while this still looks the most likely outcome, the absence of inflationary pressure lessens the onus on the Bank to act immediately," he added.
Markets have been pricing in two interest rate hikes from the BoE's Monetary Policy Committee (MPC) this year, in May and November, as workers in Britain enjoy a pick-up in wage growth.
"The fact that inflation has fallen further means that real wages are likely to have strengthened more than expected, relieving some of the pressure on consumers," noted Paul Hollingsworth, senior UK economist at Capital Economics research group.
"This means that -- somewhat counterintuitively -- the fall in inflation might make it easier for the MPC to raise interest rates."
The Bank of England's main lending rate stands at 0.5 percent. Analysts expect it to rise to 1.0 percent this year following two quarter-point hikes.