Fall in inflation in the UK fuels hopes of interest rate cut

Investors expect the Bank of England to begin cutting interest rates as early as May 2024 after inflation in the UK fell to a two-year low of 4.6 percent in October.

The markets are now calculating that the interest rate will be cut in the middle of next year, possibly as early as spring, and that it will fall to 4.75% by the end of the summer.

Bruna Skarica, UK economist at Morgan Stanley, said in a note to clients: “As we expected, October brought a further decline in core goods inflation as used car prices collapsed. But services inflation – and all the core indicators we track – were also weak.”

Read more: Inflation in Great Britain: Milk and butter prices fall, sugar rises

“The economy is weak and corporate prices are falling. Added to this are significant base effects from the energy sector. The UK no longer seems to be such a big outlier in terms of inflation. We see the figures as support for our forecast that the BoE will start cutting interest rates in May next year.”

The latest inflation data are below the Bank of England's forecast of a fall in inflation to 4.8 percent in October.

Martin Beck of the EY ITEM Club also believes that the BoE “will start cutting interest rates from late next spring, i.e. earlier than the markets currently expect”.

Samuel Tombs, an economist at Pantheon Macroeconomics, predicts that inflation will fall to about 3.5 percent by next March and then average about 2.7 percent in the second half of 2024.

Suren Thiru, director of economics at the Institute of Chartered Accountants in England and Wales (ICAEW), said: “The fall in inflation seals the rate hold in December and could lead to a split vote among rate-setters, with one member voting for a rate cut as concerns about a stagnating economy grow.”

Despite the slowdown in inflation, prices are rising twice as fast as the central bank's two percent target.

However, Bank of England Governor Andrew Bailey said it was “far too early to be thinking about cutting interest rates”.

He added: “We will monitor closely whether further interest rate hikes are necessary.”

Read more: LIVE: FTSE rises to one-month high as UK inflation falls to two-year low

Chancellor of the Exchequer Jeremy Hunt has said the government will support the Bank of England's “difficult decisions” on how to use interest rates to further reduce inflation.

Julien Lafargue, chief market strategist at Barclays Private Bank, said inflation was “still too high to be reassuring.”

The story continues

“The UK economy is still affected by stagflation and we believe the road ahead is likely to remain bumpy,” he said.

“Against this backdrop, and given the significant progress made on inflation over the past six months, we expect the Bank of England to keep interest rates unchanged for some more months,” he added.

The Bank of England has decided to keep its base rate at 5.25 percent in November. It is the second time in a row that Threadneedle Street has decided to leave the base rate unchanged after 14 consecutive hikes.

Attention: Inflation in the UK slows down significantly, giving BoE and Sunak a boost

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