The Bank of England governor has doused hopes that better-than-expected inflation news last month will accelerate cuts in interest rates, stressing the need for further evidence of wage moderation before Threadneedle Street moves. Appearing before the House of Lords economics committee on Wednesday, Andrew Bailey said it was “encouraging” that inflation had remained unchanged at 4% in January but the previous month’s figure for the cost of living had been higher than predicted. Bailey said: “We slightly overshot last month and we slightly undershot this month. That leaves us pretty much where we were.” Financial markets had been forecasting a rise in the annual inflation rate to 4.2% in January and now think the Bank will start cutting official borrowing costs from their current level of 5.25% in June. The governor said the Bank’s monetary policy committee – the nine-member body that sets interest rates – wanted to see more evidence of a cooling in wage rises before acting. It was likely pay bargainers would ask for smaller increases as inflation came down, he added. Bailey’s comments came as the Aslef rail union announced new strike dates and a six-month extension to its mandate for industrial action. After the worst year for industrial unrest since 1989, average public sector pay grew by 5.9% in the last quarter of 2023 compared with the year before, while private sector pay rose 5.8%. Investors put the chance of a quarter-point cut in June at 60%, up from 40% before the data was released. Threadneedle Street had predicted a small rise in inflation last month, while economists polled by Reuters expected an increase to 4.2%. Bailey said it was “touch and go” the UK economy was in technical recession – indicated by two successive quarters of falling output – in the second half of 2023 but there were signs of a “modest pick-up” in activity in early 2024 that would continue thereafter. Hours earlier, the Office for National Statistics said inflation remained unchanged in January after the first fall in food prices in more than two years and deep discounts in the winter sales for clothing and furniture offset rising gas and electricity bills. Offering consumers some respite amid the cost of living crisis, the latest figures showed food and non-alcoholic drink prices fell at a monthly rate of 0.4% in January. It was the first monthly decline since May 2021, driven by price cuts on bread and cereals, cream crackers, sponge cake and chocolate biscuits. Against a backdrop of a tough Christmas for UK retailers because of weak consumer spending, furniture prices also fell at the fastest monthly rate in four years amid steep reductions for kitchens, leather settees, dining tables and chairs. Last month’s better-than-predicted news on the cost of living is likely to be followed by a fall in inflation to below the government’s 2% target within months, helped by a sharp fall in the Ofgem price cap in April amid a decline in wholesale energy prices. Inflation was last at 2% in July 2021 and rose to a peak of 11.1% in October 2022 before starting to decline. The chancellor, Jeremy Hunt, said: “Inflation never falls in a perfect straight line, but the plan is working; we have made huge progress in bringing inflation down from 11%, and the Bank of England forecast that it will fall to around 2% in a matter of months.” Core inflation – which excludes energy, food, alcohol and tobacco, and is closely watched by the Bank – remained unchanged in January at 5.1%, according to the ONS. Services inflation rose to 6.5% in January, up from 6.4% a month earlier. Rachel Reeves, the shadow chancellor, said: “After 14 years of economic failure, working people are worse off. Prices are still rising in the shops, with the average household’s costs up £110 a week compared to before the last election.”