Interest rate futures were pricing a roughly 63% chance that the BoE will cut Bank Rate to 5.0% from 5.25% - its highest since 2008 - at its June meeting, up from about 58% before the inflation data. They were fully pricing in a 25 basis-point cut in August.
British inflation slowed to 3.4% in February from 4.0% in January, according to data from the Office for National Statistics. Economists polled by Reuters had mostly expected a drop to 3.5%.
Services inflation, which the BoE is watching closely, dropped to 6.1% from 6.5% as the central bank had expected.
Five-year gilt yields were down by 5 basis points at 3.921% having earlier touched their lowest level in a week at 3.990%.
James Smith, an economist with ING, said the chances of a rate cut by the BoE's Monetary Policy Committee as early as June depended on a bigger-than-expected slowdown in services inflation and wage growth data between now and then.
"But more likely we think the Committee will wait for a few more numbers and also a new round of forecasts, which makes August a more likely candidate for the first rate cut," Smith said in a note to clients.
Markets are now pricing in about 70 basis points of BoE rate cuts by December this year, or nearly three separate quarter-point reductions, compared with about 67 basis points before the British inflation data was published.
(Reporting by Suban Abdulla; Editing by William Schomberg)
