Britain’s inflation rate fell more sharply than expected last month to 3.2%, dispelling persistent doubts about whether the Bank of England will cut the country’s borrowing costs and provide an early Christmas present.
Bank policymakers announced their December decision at noon on Thursday, and had already been widely expected to cut the benchmark interest rate by 0.25 percentage points from its current 4% level after a 5-4 vote last month.
But they will be relieved that annual inflation, based on the consumer price index, has slowed significantly from 3.6% in October to 3.2% last month. After the snapshot fell, market bets on a possible rate cut rose by more than 98%.
Some details were also encouraging, particularly that food price inflation slowed to an annual rate of 4.2% in October from 4.9%. This is still an impressive weekly supermarket growth rate, but it is a move in the right direction.
The Office for National Statistics highlighted a month-on-month drop in prices for some food items, including a 4% drop in sugar and a 4.2% drop in pasta and couscous.
The annual services inflation rate remains high at 4.4%, but has fallen from 4.5% in October and is the lowest since December 2024.
For Rachel Reeves, this news will be welcome. With tax hikes on the horizon and a clear slowdown in the labor market, he will be hoping for “a series of interest rate cuts… the shot the economy needs” as called for by the trade union conference on Wednesday.
The central bank’s nine-member Monetary Policy Committee has become cautious in recent months, concerned that the expected short-term “hump” in inflation this year could become a longer-term phenomenon as wage growth remains strong.
The government cut interest rates in February, May and August, but decided to do so at the last minute last month as speculation about the size of the tax hike reached a fever pitch ahead of the Budget.
Policymakers are also keeping a close eye on how much of the £25bn increase in employer national insurance contributions Mr Reeves launched in April will be passed on to consumers through higher inflation.
The answer seems to be “some.” Some employers appear to be cutting back on their hiring plans. However, the cost increase is a one-time occurrence and should become less of a concern over time.
But some MPC members are becoming increasingly concerned about the impact of keeping interest rates as high as 4% amid a slowing economy.
Independent Party member Swati Dhingra argued in September that the Bank should not be “overly cautious” about cutting interest rates, as much of Britain’s rise in inflation is due to temporary factors and will pass.
In last month’s budget, Reeves introduced a series of measures aimed at curbing inflation, including cutting home utility bills starting next spring, partly with central bank rate setters in mind.
He hopes the latest inflation data will confirm that the worst of inflation is over and that the central bank will respond quickly with interest rate cuts, helping restore some feel-good factor to the fragile economy in the new year.
