A pre-Christmas interest rate cut looks increasingly likely after official figures showed inflation at a four-month low.
Investors now think there is an 85 per cent chance of a December cut by the Bank of England, in a boost for millions of borrowers.
That was after the Office for National Statistics said consumer price index inflation fell from 3.8 per cent in September to 3.6 per cent in October.
Lower gas and electricity bills – after regulator Ofgem reduced the energy price cap – were the main factor while hotel prices also dipped.
This was partly offset by an acceleration in food prices – a worry for families ahead of Christmas.
UK inflation remains the highest across the G7 group of advanced economies and well above the Bank of England’s 2 per cent target.
Inflation down: Investors now see an 85% chance of a December cut by the Bank of England in a boost for millions of borrowers
But the latest figures appear to confirm the Bank’s view that it has now peaked. Earlier this month, Bank rate-setters only narrowly avoided cutting interest rates, voting 5-4 to keep them on hold.
Governor Andrew Bailey indicated he was waiting for further evidence that inflation pressures were coming under control before swinging behind a cut.
Since then, official figures have revealed unemployment rising to a four-year high, wage growth fading, growth stagnating and yesterday’s drop in inflation, which was in line with the Bank’s expectations.
Tax increases in the Budget next Wednesday could further hit demand in the economy, providing further deflationary pressures.
The next inflation figures – for November – will be published on December 17 and could cement a decision by the Bank’s Monetary Policy Committee the following day to cut rates from 4 per cent to 3.75 per cent.
Bank rate has not been as low since February 2023 when it was hiked from 3.5 per cent to 4 per cent.
Yesterday’s UK inflation figure was slightly higher than some economists who had pencilled in a fall to 3.5 per cent, had been expecting.
But inflation in the services sector – a metric closely watched by the Bank – was a little lower than forecast, at 4.5 per cent rather than 4.6 per cent.
‘As a result, these data continue to support the case for a rate cut next month,’ said George Buckley, an economist at the financial services group Nomura.
The pound fell as much as half a cent versus the dollar on the figures to less than $1.31, and was down against the euro at just above €1.13.
Government short-term borrowing costs with yields on two-year gilts – closely linked to interest rate expectations – dipped to 3.76 per cent.
However, ten-year yields – afflicted by the uncertainty surrounding next week’s Budget – briefly spiked towards a one-month high of 4.6 per cent before coming back down.
Sanjay Raja, chief UK economist at Deutsche Bank, said: ‘The MPC now has a clearer path for a Christmas rate cut.
‘With the labour market softening more than expected, GDP growth weaker than the Bank of England projected, and underlying inflation tracking a little lower than BoE expectations, we think Governor Bailey… will feel more confident about cutting below 4 per cent.’
DIY INVESTING PLATFORMS
AJ Bell
AJ Bell
Easy investing and ready-made portfolios
Hargreaves Lansdown
Hargreaves Lansdown
Free fund dealing and investment ideas
interactive investor
interactive investor
Flat-fee investing from £4.99 per month
Freetrade
Freetrade
Investing Isa now free on basic plan
Trading 212
Trading 212
Free share dealing and no account fee
Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.
