UK inflation is at its lowest for nearly six years, dropping to 3.2% last month from 3.6% in October. This more-pronounced-than-expected decline has pretty much taken all the guesswork out of the Bank of England’s next decision on interest rates. Many analysts now predict that the central bank will announce a rate cut during its meeting on Thursday, potentially delivering an early Christmas present to British consumers.
As we know, the annual inflation rate has abated significantly. This is largely the result of a deceleration in food price inflation, down from 4.9% to 4.2% since October. Although annual services inflation is still quite elevated at 4.4%, it ticked down a notch from 4.5% last month. After peaking above 11 percent, inflation has recently fallen more than expected, increasing hopes that the Bank of England will start to cut borrowing costs. Market estimates now imply more than a 95% likelihood of a rate cut.
Policymakers on the Monetary Policy Committee at the Bank of England are watching inflation data like hawks. They’re especially concerned about the £25 billion jump in employer national insurance contributions that took effect last April. They’re estimating what percentage of this jump could fall on consumers. This would threaten consumers with increased costs of goods. Indeed, perhaps most remarkably, a few months before she joined the MPC, Swati Dhingra had argued that much of the inflationary pressures were transitory and would soon subside.
The Bank of England has raised the rate repeatedly this year. It reduced rates in February, May and August, but decided to hold steady at its meeting last month. This is despite current forecasts expecting a base rate cut of 0.25 percentage points from its current level of 4%.
Shadow chancellor Rachel Reeves will be pleased to see the inflation drop today, as it feeds directly into her economic agenda of focusing on moderation and stability.
“A sequence of rate cuts … a shot in the arm that the economy needs.” – Trades Union Congress
The Bank of England’s policymakers will announce their decision at noon on Thursday, and many observers will be watching closely to see how their analysis of inflation influences their forthcoming actions. The unexpected speed of inflation’s decline marks a change in the economic landscape. This major transformation presents a test and an opportunity for the future prosperity and wellbeing of the UK economy.