Hopes for interest rate cuts in 2024 rise after stronger-than-forecast decline in inflation

Inflation fell unexpectedly last month to its lowest level in over two years, reinforcing forecasts that the Bank of England will begin cutting interest rates in early 2024.

Official figures showed that falling fuel prices and a further decline in food inflation pushed the consumer price index (CPI) down to 3.9% in November from 4.6% in October, the lowest since September 2021.

The decline was far greater than expected. Most economists had expected inflation to fall back to 4.3 percent last month.

Following the release of figures from the Office for National Statistics (ONS), the pound fell by 0.6 percent to 1.27 US dollars and by 0.3 percent to 1.15 euros. The sharp decline was seen as evidence that bank policymakers will begin cutting interest rates in the first half of next year.

This represents another dramatic decline after inflation fell from 6.7 percent in September to 4.6 percent in October, prompting Prime Minister Rishi Sunak last month to announce an early success in his target of halving inflation by the end of the year.

Mr Sunak said on Wednesday the recent fall in the consumer price index was “good news for everyone in this country”.

But the bank recently warned that the task of bringing inflation back to the two percent target is far from complete. It also dampened all speculation about an imminent interest rate cut.

It left the interest rate at 5.25 percent last week, while three of the nine members of the Monetary Policy Committee (MPC) voted for an increase to 5.5 percent.

The ONS confirmed that the Bank did not have access to the most recent inflation figures before its recent decision.

Experts say the bank will come under pressure to curb its interest rate signals.

Martin Beck, chief economic adviser at the EY Item Club, said the extent of the recent decline in inflation “calls into question the justification for high interest rates in the long term”.

He expects the interest rate cuts to begin next spring.

Samuel Tombs of Pantheon Macroeconomics added: “The surprisingly sharp decline in consumer price index inflation in November reinforces the likelihood that the MPC will begin cutting the policy rate in the first half of 2024, much earlier than previously announced.”

He expects headline consumer price index (CPI) inflation to reach the bank's target of 2% in the second quarter of next year.

The bank predicted last month that it would take another two years to reach its target again.

Chancellor of the Exchequer Jeremy Hunt claimed Britain was “back on track for healthy, sustainable growth” following a sharp fall in inflation.

He said: “With inflation more than halved, we are starting to take inflationary pressures out of the economy.

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“Together with the corporate tax cuts announced in the autumn report, this means we are back on track for healthy and sustainable growth.”

Grant Fitzner, chief economist at the ONS, said that although inflation is currently at a two-year low, “prices are still well above pre-Ukraine invasion levels.”

ONS data showed that falling prices at the pump helped reduce the rate of inflation last month, with the average price of petrol falling by 4.1 pence per litre between October and December, to stand at 151 pence last month.

The consumer price index (CPI) was also dragged down by a further slowdown in annual food price inflation, which fell to 9.2 percent last month (from 10.1 percent in October), the lowest since May last year.

The latest data also showed a fall in the Consumer Price Index (CPI), which measures the rate of inflation including housing costs (CPIH), to 4.2 percent in November (from 4.7 percent in October), while the Retail Price Index (RPI) fell to 5.3 percent from 6.1 percent.