Interest rate cut likely after inflation undershoots expectations
Inflation dropped far below market expectations in November, official data has shown, easing Bank of England doves’ nerves a day before a decision on whether to cut interest rates is revealed.
The Office for National Statistics (ONS) said inflation hit 3.2 per cent in the year to November, staying well above the Bank’s 2 per cent target but coming below market expectations.
The previous month’s figure for inflation was 3.6 per cent by comparison.
Core inflation, which excludes utility bills and food costs, was 3.2 per cent.
The main drivers of inflation on the month included items such as cakes, women’s clothing and tobacco prices, according to officials at the ONS.
“Inflation fell notably in November to its lowest annual rate since March,” said Grant Fitzner, chief economist at the ONS.
Chancellor Rachel Reeves, said: “I know families across Britain who are worried about bills will welcome this fall in inflation.
“Getting bills down is my top priority. That is why I froze rail fares and prescription fees and cut £150 off average energy bills at the Budget this year.
“The Bank of England agree this will help cut prices and expect inflation to fall faster next year as a result.”
Bank faces calls to cut interest rates
Today’s figures will be the final piece of economics news that Bank policymakers will see before they make their final vote of the year on monetary policy.
The Bank is facing intense pressure to lower borrowing costs to revive the UK’s fledgling jobs market, which saw the highest number of redundancies in the three months to September since the pandemic.
The latest set of figures also showed wage growth cooling slightly across the private sector to 3.9 per cent. Analysts at KPMG UK and the National Institute of Economic and Social Research (NIESR) have said the slowdown in inflation made the chances of an interest rate cut on Thursday likelier.
Quilter strategist Lindsay James said lower inflation levels should not be read as welcome news.
“With Christmas right around the corner, consumers are still having to contend with the UK’s inflation problem just as the shopping list grows and hosting duties commence,” James said.
“Whilst UK inflation may have fallen to 3.2 per cent, down from 3.6 per cent, a decent fall compared to last month, the UK continues to be an outlier compared to European peers.
“There is little Christmas cheer as inflation remains well above the Bank of England’s 2 per cent target while economic growth grinds to a halt.”
Inflation data to be considered by Bank of England
Economists on City PM‘s Shadow Monetary Policy Committee voted in favour of interest rates being cut by 25 basis points to 3.75 per cent.
Responding independently of her organisation, Anna Leach, the Institute of Directors’ chief economist, said falling inflation expectations and the probability of a hit to demand from lower inflation justified a rate cut.
“Although the inflation rate still sits well outside the target range, various measures are moving in the ‘right’ direction to support further rate cuts,” Leach said.
Dissenting economists Julian Jessop and former Bank rate-setter Jonathan Haskel warned that the Bank should look to focus on squeezing out all inflationary pressures.
The Bank’s MPC is widely expected to cut interest rates but there is some caution over what Governor Andrew Bailey’s next move may be.
Among those on the committee, Clare Lombardelli, Megan Greene, Catherine Mann and Huw Pill are predicted to vote to leave interest rates on hold.
Swati Dhingra, Alan Taylor, Sarah Breeden and Dave Ramsden are expected to vote in favour of a six cut in the cycle, which began in August 2024, making Bailey the outlier left to make the final call.