(April 15): Britain is starting to rein in inflation at a quicker pace than the US, underscoring a divergence between the two economies that may allow the Bank of England (BOE) to move sooner on cutting interest rates than the US Federal Reserve.

Official figures due out this week in the UK are likely to show that the consumer prices index eased further in March while unemployment picked up as the nation starts to shake off a recession, a survey of economists shows. The US by contrast just reported an unexpected rise in inflation and a falling jobless rate, with the economy getting stronger.

The results mark a big shift, with investors now increasing bets that the UK central bank could be on the leading edge of a global move towards lower borrowing costs later this year instead of trailing the pack. While they’ve pushed back the date expected for the first US rate cut to September, markets are now almost fully pricing in a reduction in Britain in August.

“The UK inflation has surprised to the downside over the last two prints, and we think this momentum can continue,” said Megum Muhic, a strategist at RBC Capital Markets.

Even so, traders are reluctant to push too hard on the idea of prompt BOE rate cuts. Officials including Catherine Mann, Jonathan Haskel and Megan Greene have signalled lingering concerns about inflationary pressures. And the Fed’s market dominance also gives reasons to hesitate.

Money markets have swung back in forth in recent weeks about the outlook for the UK. Last week, they pared wagers for aggressive rate cutting because of policymaker comments and a hotter-than-expected inflation print in the US.

Even so, some analysts are starting to argue that the BOE’s position has shifted, that inflation is likely to drop back to the 2% target and that there’s a credible path for easing rates in the coming months.

“The BOE can resist the Fed’s pull,” Dan Hanson and Ana Andrade at Bloomberg Economics wrote in a note on Monday. “Different inflation dynamics, the BOE’s policy track record and limited exchange rate effects mean the Fed won’t stand in the way of the UK central bank cutting rates as soon as June and by more than markets expect.”

A gulf between interest rate policies is likely to be a key theme at the spring meetings of the International Monetary Fund in Washington this week.

Both UK Chancellor of the Exchequer Jeremy Hunt and BOE governor Andrew Bailey will be in Washington when the Office for National Statistics publishes UK inflation and wage data. The reports are expected to show, based on survey results as of Friday:

• UK inflation edging down for a second consecutive month to 3.1% in March from 3.4% the month before.
• Unemployment ticking up to 4% in the quarter through February from 3.9% in the previous period, the second month running or rising joblessness.
• Regular wage growth easing to 5.8% from 6.1% in the same period.

In the US by contrast, inflation has risen for last two months to 3.5%. The UK’s headline inflation rate is now lower than the US for the first time since the March 2022, and the BOE expects it to drop below the 2% target in April.

Hanson and Andrade said the US, where GDP growth is surging, is not the right barometer “for this side of the Atlantic at this point, especially the UK.” They pointed to a number of factors.

• The UK is just recovering from a mild technical recession and demand remains relatively weak, unlike the US.
• Falling energy prices will reduce inflation. As lower gas prices feed through to household bills, inflation will drop toward or below 2% “for much of this year.” The US did not suffer the same energy price shock and so will not benefit from the reverse as prices fall.
• Lower headline inflation will bring down core inflation, which strips out volatile food and energy. Core inflation is more elevated than in the US and remains a concern for the BOE but falling headline “should in time feedback onto wages and underlying price pressures.”
• The BOE has diverged from the Fed in the past. It neither followed the Fed’s rate cuts in the early 2000s nor its rate rises after 2016. It also hiked rates before the Fed in 2021 as inflation took off.

The BOE has also argued that monetary policy will still be restrictive, meaning it continues to bear down in inflation, even if it cuts interest rates. Bailey has two major speaking appearances in Washington where he could adjust that sentiment.

“The big difference is that the UK economy is not as strong as the US and activity is picking up from a weaker starting point,” said Ruth Gregory at Capital Economics. Both Britain’s core and services measures of CPI “offers encouragement that a downward inflation trend is still underway.”