UK inflation dropped to 3.2% last month, well below the government’s 4% target. This larger-than-expected drop has dramatically shifted market expectations for interest rates. That’s a significant decrease from 3.6% in October. This change has raised the odds that the Bank of England will announce a surprise early cut to interest rates at its meeting Thursday.
Yesterday’s inflation report brought some good news with the annual services inflation rate finally showing signs of easing. It tumbled .1% from 4.5% in October to 4.4%. That would be the slowest year-on-year services inflation since December 2024. By contrast, food price inflation continued to cool, slowing to an annual rate of 4.2%, down from 4.9% a month prior. The current economic landscape suggests that the Bank of England policymakers are carefully observing these trends as they prepare for their December decision.
Market sentiment has turned completely upside down in the wake of the July inflation picture, with bets on a rate cut now over 95%. The base rate is just 4% at the moment, and this sudden drop in inflation has removed fears from the prospect of cuts. Just last month, the Bank of England reversed course and hit the brakes on expected rate cuts. With new numbers out today, they may have to reconsider their plan.
The Bank of England responded by cutting rates in February, May and August of this year. That’s a clear indication that they’re being more preemptive in their approach to trying to steer economic conditions. Now, with inflation having recently fallen again, there are increasing calls from some quarters of the economic community to go further. Former Bank of England economist Swati Dhingra made the case recently that the Bank has been too “timid” in cutting rates.
Moreover, policymakers have been monitoring the implications of Reeves’s £25 billion increase in employer national insurance contributions, which commenced in April. Specifically, they are focused on how this large increase will work through the economy to reduce overall economic activity and inflationary pressures.
At the Bank of England, anticipation is building for the 12 noon announcement on Thursday morning. Stakeholders from all sectors are anxious to see which economic indicators will guide the Fed’s decisions on monetary policy.
“A sequence of rate cuts to deliver a shot in the arm that the economy needs.” – Trades Union Congress