Investors have cut bets on another interest rate increase today, forecasting that the Bank of England will hold borrowing costs at 5.25% following a surprise fall in inflation.

Britain’s cost of living crisis eased slightly last month, with August’s annual inflation rate falling to 6.7% from 6.8% in July.

Economists had expected an increase, to around 7%, due to rising petrol prices. But instead, the headline rate of inflation fell – as did underlying (or ‘core’) inflation.

Chancellor Jeremy Hunt has hailed the drop as evidence that the government’s plan to halve inflation was on track.

And City investors have been reacting by cutting forecasts for UK interest rates.

Prior to the release of yesterday’s data, a further increase in borrowing costs today looked to be almost inevitable. However, analysts are now not so sure what will happen the base rate.

If the Bank of England does leave interest rates on hold, it will be the first time since November 2021, they have been kept at their existing,

Berenberg Bank says the decision, due at midday, is on a knife-edge, while Sushil Wadhwani, a former Bank of England policymaker, told Radio 4’s Today programme that the latest inflation data makes it less likely that the Bank of England will need to raise interest rates today.