A general view of people visiting the Trafalgar Tavern pub decorated with bunting and string lights on the bank of the River Thames in Greenwich on December 16, 2023 in London, United Kingdom. — John Keeble | Getty Images News | Getty Images

The U.K.'s annual inflation rate fell to 2.6% in March, coming in below analyst expectations, according to data released by the Office for National Statistics (ONS) on Wednesday.

Economists polled by Reuters had anticipated the consumer price index would hit 2.7% in the twelve months to March.

The rate of price rises in Britain hit 2.8% in February, after rising sharply to 3% in January.

Core inflation, which excludes more volatile energy, food, alcohol and tobacco prices, rose by 3.4% in the year to March, down slightly from 3.5% in February.

The largest downward contributions to the monthly change in the inflation rate came from recreation and culture, and motor fuels, the ONS said, while the largest upward driver was clothing.

Sterling was up 0.25% against the U.S. dollar at $1.3265, following the data release.

The latest data will be analyzed closely by policymakers at the Bank of England, who are expected to cut interest rates when they next convene on May 8. The BOE held rates at 4.5% at its previous meeting in March amid a forecasted inflation hike and uncertainty over economic growth and global trade under U.S. President Donald Trump's tariffs.

There was good news for the U.K. last week, when the latest monthly growth data showed that the British economy grew by 0.5% month-on-month in February. The U.K. is also hoping to sign a trade deal with Washington, having escaped relatively unscathed from Trump's tariffs regime with just a baseline 10% duty on imports to the States.

Traders will be looking closely at the BOE's next policy statement on Thursday for its assessment of the economic outlook for the country.

In a statement out in March, the central bank said "global trade policy uncertainty has intensified, and the United States has made a range of tariff announcements, to which some governments have responded."

"Other geopolitical uncertainties have also increased and indicators of financial market volatility have risen globally," it added.

The BOE warned in February that it expected inflation to temporarily rise to 3.7% in the third quarter of this year, as energy costs are set to accelerate. At the time, it also halved its 2025 growth forecast for the U.K. to 0.75%