The pound weakened 0.5 per cent against the dollar to $1.4614 after figures published by the Office for National Statistics (ONS) showed consumer price inflation stayed flat at zero per cent in March.
Although it means the UK has missed slipping into deflation for now, a sustained period of stagnant growth is nevertheless a concern. Technically, at 0.01 per cent, the figure shows deflation - although officially, the ONS rounded up to zero per cent.
The figure means prices remain at their weakest since 1960, while core inflation, which excludes energy, food, alcohol and tobacco, fell to one per cent, from 1.2 per cent in February.
As in previous months, prices were pushed down by a fall in the price of gas, as well as sales among clothing retailers and a bitter price war between supermarkets, which pushed food prices down - although the price of motor fuels edged up by 3.8p per litre between February and March. It's a sign the fall in oil prices is stagnating, after the cost of motor fuels plummeted 13.7 per cent in the year to March.
The news keeps pressure to hike interest rates off the Bank of England, but does leave its options limited. Joshua Raymond, chief market analyst at City Index, said it was "between a rock and a hard place".
The threat of deflation is pushing market views for the BoE’s first rate hike further out and while today's inflation reading will do little to change current forecasts, there were some fears we could see a deflationary print today.
But, with wages growth now at 1.6 per cent, house buyers, consumers and borrowers will all be buoyed by the news - as will the government.
"Today's news will likely be championed to the hills by the Conservatives as part of their election drive in giving consumers more spending power," pointed out Raymond.