Yahoo Finance UK inflation drop fuels hopes for interest rate cut
Investors are betting the Bank of England will start cutting interest rates as early as May 2024 as UK inflation dropped to a two year low of 4.6% in October.
Markets are now pricing in a fall in the interest rate in the middle of next year, possibly as soon as spring, coming down to 4.75% by the end of summer.
Bruna Skarica, UK economist at Morgan Stanley, said in a note to clients: "As we had expected, October brought another leg lower in core goods inflation, as used cars prices collapsed. But services inflation – and all the core metrics we track – were soft as well.
Read more: UK inflation: Milk and butter prices drop but sugar rises
"The economy is weak, and firms’ pricing is waning. On top of all this came sizeable base effects from energy. The UK no longer looks like such a major outlier when it comes to inflation. We see the print as supportive of our call of BoE cuts next year, from May."
The latest inflation data is below the Bank of England’s prediction that inflation would fall to 4.8% in October.
Martin Beck at the EY ITEM Club also thinks the BoE “will start cutting interest rates from late next spring, sooner than markets currently expect”.
Samuel Tombs, economist at Pantheon Macroeconomics, predicts inflation will ease to around 3.5% by next March and then to average about 2.7% in the second half of 2024.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales (ICAEW), said: "This fall in inflation seals the deal on a December interest rate hold and may drive a three-way voting split among rate setters with a member voting for a rate cut as concerns over a flatlining economy grow.
Despite the slowdown in inflation, prices are rising at more than twice the pace of the central bank’s 2% target.
The Bank of England’s governor, Andrew Bailey, however, has said it was "much too early to be thinking about rate cuts".
He added: "We'll be watching closely to see if further rate increases are needed."
Read more: LIVE: FTSE soars to one-month high as UK inflation hits two-year low
Chancellor Jeremy Hunt has said the government would back the Bank of England’s “difficult decisions” on using interest rates to further lower inflation.
"Now we are beginning to win the battle against inflation, we can move onto the next part of our economic plan, which is the long term growth of the British economy."
The Chancellor speaks to @SkyNews on the news that inflation has halved ahead of next week's Autumn Statement. pic.twitter.com/bH2piqTAIf— HM Treasury (@hmtreasury) November 15, 2023
Julien Lafargue, chief market strategist at Barclays Private Bank, said inflation is “still too high for comfort”.
“The UK economy is still very much facing stagflation and, in our view, the road ahead will likely continue to be bumpy,” he said.
“In this context, and given the significant progress achieved on inflation’s front over the last six months, we would expect the Bank of England to keep interest rates unchanged for a few more months,” he added.
The Bank of England has voted to keep the base rate at 5.25% in November. It's the second time in a row that Threadneedle Street opted to keep the base rate unchanged after 14 consecutive hikes.
Watch: UK inflation slows sharply, boosting BoE and Sunak
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