Britain's latest inflation figures have hit the government's 2.5 per cent target and prompted a further decline in sterling as City markets focus on the scope for lower interest rates, possibly next month.

Sterling closed two pfennigs lower at 2.8288 deutschmarks and its trade-weighted index against a basket of world currencies declined 0.9 to 102.1. Both measures were the lowest since last year with the sterling/deutschmark rate moving closer to the 2.78 exchange rate seen as being likely by the Bank of England.

Inflation figures showed "headline" retail price index inflation running last month at an annualised rate of 3.3 per cent, down from 3.5 per cent in July. The underlying rate of inflation excluding mortgage interest edged down from 2.6 to 2.5 per cent, in line with the government's target.

Main influences behind the reduction in inflation came from motoring costs as last year's budget increases in petrol prices dropped out of the 12 month comparison. Also, housing cost inflation eased as a result of last year's mortgage rate increases also dropping out of the comparison.