By Suban Abdulla and William Schomberg
LONDON (Reuters) -Britain's inflation rate slowed by less than expected in March, according to official figures published on Wednesday, adding to signs that a first interest rate cut by the Bank of England could be further off than previously thought.
British consumer prices rose by an annual 3.2%, down from a 3.4% increase in February and its lowest in two and a half years, the Office for National Statistics said.
But the BoE - which has an inflation target of 2% - and economists polled by Reuters had forecast 3.1%. Investors reduced their bets on BoE rate cuts and sterling rose.
The slowdown in the fall in Britain's inflation rate follows an acceleration of headline price growth in the United States which rose for a second month in a row to 3.5% in March, according to data published last week.
BoE Governor Andrew Bailey, who last month said British inflation was "moving in the right direction" for a rate cut, said on Tuesday that different inflation dynamics in the U.S. and Europe could lead to different paths for interest rates.
But analysts said Wednesday's data served as a reminder that Britain's fight against inflation was not yet won.
Ruth Gregory, deputy chief UK economist at Capital Economics, said there was a risk that Britain will follow the trend in the U.S. and see inflation stall.
"The chances of interest rates being cut for the first time in June are now a bit slimmer," she said.
Sterling rose by about half a cent against the dollar immediately after the figures were published. It was also up against the euro.
The BoE is still expected to cut interest rates later this year but investors on Wednesday trimmed their bets on the scale of its moves, fully pricing in only one quarter-point cut by the end of 2024, possibly as late as November.
Federal Reserve Chair Jerome Powell said on Tuesday that recent data on inflation had not given U.S. policymakers the confidence needed for them to pivot to rate cuts soon.
SMALL EASING OF INFLATION PRESSURES
Details of Wednesday's data showed core inflation, which excludes energy, food and tobacco prices, slowed to 4.2% from 4.5% in February. The Reuters poll had pointed to a reading of 4.1%.
Services inflation, an indicator of domestic price pressures which the BoE also watches closely, eased only slightly to 6.0% from 6.1%.
The statistics office said a slowdown in food prices was the main contributor to the decrease in headline inflation. Prices of food and non-alcoholic beverages increased by 4% over the 12 months to March, their weakest rise since November 2021.
However, an increase in fuel prices slowed the fall in the headline rate. International oil prices climbed last month amid growing tensions in the Middle East.
Data published on Tuesday showed British wage growth was cooling but remained strong by historical standards.
The BoE is concerned that rapid wage growth, which makes up much of the inflation rate in the services sector, could sustain inflationary heat across the economy.
"Inflation is in retreat but the Bank of England cannot yet be sure that it is beaten," Ian Stewart, chief economist at Deloitte, said.