UK inflation has fallen to 3.0% in the 12 months to January, the Office for National Statistics reveals.

January’s figures was 0.4% lower than the 3.4% reported in December.

Transport, and food and non-alcoholic beverages made the largest downward contributions to the monthly change.

Earlier this month, the Bank of England held the base rate at 3.75% as markets widely expected. 

The rate-setting Monetary Policy Committee voted in a 5-4 split in favour of holding the rate.

Inflation has fallen a long way from its peak of over 10% three years ago, and the BoE now expects it to be back to its 2% target this spring.

On 5 February, the MPC said: “If the economy and the outlook for inflation evolve as we expect, there should be scope for some further cuts to Bank Rate this year.”

“But we’ll have to judge the latest information and data at each of our meetings and set whatever interest rate is necessary to make sure that inflation stays low and stable.”

Commenting on today’s figures, LSL Financial Services chief distribution officer Emma Hollingworth says: “A reading of 3% this morning is good news, not least as it shows December’s uptick in inflation has not carried forward into the new year and progress back towards 2% is regaining momentum.

“That may soften the stance of the more hawkish members of the Monetary Policy Committee (MPC) when it next meets in March – the MPC’s 5–4 split earlier this month underlined how finely balanced the outlook already has been.

“This morning’s data now strengthens the case for a cut to base rate, although the Bank of England is still likely to want to see sustained evidence that inflation is moving convincingly back towards target before adjusting policy.

“With markets having anticipated a move lower, today’s reading is likely to reinforce existing expectations around the direction of interest rates rather than dramatically alter them.”

“Even so, incremental shifts in confidence can filter through to mortgage pricing over time. Lenders are likely to remain measured in their response, adjusting pricing cautiously while continuing to reflect the broader inflation and funding environment.”

Meanwhile, Bestinvest by Evelyn Partners personal finance analyst Alice Haine adds: “The headline rate of inflation fell to 3% in the 12 months to January – the lowest rate in almost a year – delivering welcome relief to households concerned that runaway price rises were returning after December’s larger-than-expected uptick.”

“The Bank of England has already signalled that inflation has peaked and is expected to recede towards its 2% target by April.”

“Lower inflation, sluggish economic growth and a softening jobs market – with unemployment at a five-year high of 5.2% and wage growth continuing to moderate – are likely to pave the way for another interest rate reduction sooner rather than later.”

“The central bank’s Monetary Policy Committee was deeply divided when its panel of nine members voted earlier this month, and many will hope the softer inflation reading helps shift sentiment towards a seventh rate cut at the next meeting in March.”

“While higher interest rates are succeeding in curbing high inflation, policymakers must still assess whether any lingering price pressures remain before pushing ahead with another reduction.”

Also commenting, Mortgage Advice Bureau director of home moving Ben Thompson explains: “This morning’s drop in inflation to 3% is the ‘green light’ the mortgage market has been waiting for.”

“The Bank of England held its breath earlier this month, but with inflation now cooling faster than expected, the pressure to cut the base rate in March has gone from a simmer to a boiling point. While the market has been stabilising for months, this latest drop is the spark that could ignite a fresh price war among lenders.”

“For anyone moving home or looking to remortgage, the landscape has changed overnight. The ever-present ‘mortgage cliff’ is flattening, with those coming off historic lows will find the transition to today’s deals far more manageable than the volatile peaks of last year.”

“Crucially, lower inflation also makes lender ‘stress tests’ easier to pass, handing first time buyers back the borrowing power that has felt out of their grasp for years.”