Pre-Christmas discounts and a cut in sales tax pushed inflation down by its biggest margin in almost 17 years last month, but the fall was less dramatic than analysts had forecast, official data showed yesterday.
The headline rate of consumer price inflation slowed to 3.1 per cent from 4.1 per cent, its lowest level since last April but still above the Bank's two per cent target.
Analysts had forecast a much sharper drop in the annual rate to 2.7 per cent.
The pound pared earlier losses against the dollar as the smaller-than-expected drop in inflation suggested the Bank may cut rates less aggressively than they had forecast.
"The CPI numbers are disappointing. They have not fallen back as much as expected," said David Page, an economist at Investec. "Some of that is due to the only partial pass-through of the VAT reduction."