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UK inflation fell more than expected to an eight-month low of 3.2 per cent in November, strengthening the case for the Bank of England to cut interest rates on Thursday to boost a weakening economy.
Wednesday’s figure from the Office for National Statistics was below the forecasts of 3.5 per cent from analysts polled by Reuters. It also marked a slowdown from October’s 3.6 per cent.
November’s reading was pulled down by weaker food, drink and clothing prices, the ONS said.
BoE governor Andrew Bailey signalled his support for a further quarter-point rate reduction to 3.75 per cent at this week’s meeting of the Monetary Policy Committee, as long as official data shows an ongoing easing of price pressures.
Following the data, traders were near to fully pricing in a reduction in borrowing costs on Thursday and expect another cut by April, according to the swaps market.
The pound fell 0.7 per cent to $1.333 against the dollar and the yield on the two-year gilt, which is sensitive to interest rate expectations, dropped 0.05 percentage points to 3.70 per cent.
Bailey has indicated that further reductions would leave rates at around 3.5 per cent next year, but some economists said the MPC might need to move more aggressively.
Tomasz Wieladek, chief European macro strategist at asset manager T Rowe Price, said November’s figure was “a clear signal that the cutting cycle is far from done”, adding that it “clearly is a challenge to the more hawkish MPC members”.
The MPC has been deeply divided for months over whether to prioritise boosting anaemic economic growth or to bear down on inflation, which peaked at 3.8 per cent over the summer. It has cut interest rates five times since the summer of 2024.
November’s reading comes a day after official figures showed the UK unemployment rate climbed to 5.1 per cent in the three months to October, in the latest signs of strain in an economy hit by higher taxes. The economy contracted by 0.1 per cent in October.
Services inflation, a measure closely tracked by rate setters, eased to 4.4 per cent in November from 4.5 per cent in October. Core inflation, which excludes energy and food, was 3.2 per cent, down from 3.4 per cent in October and below economists’ expectations.
Several MPC rate setters have been concerned that the run-up in inflation over the summer, led in part by food prices, risked driving up consumer expectations for future inflation.
James Smith, an economist at ING, said such fears looked “increasingly overblown”, adding that the latest drop in inflation “fits into a broader body of evidence suggesting that price pressures are cooling”.
The prospect of further rate cuts will be welcomed by chancellor Rachel Reeves, who has insisted that growth remains the government’s priority despite raising the tax burden on business.
Reeves’ November Budget is set to reduce headline inflation by about 0.4 to 0.5 percentage points as a result of cost of living policies aimed at trimming energy costs, the BoE estimates.
Responding to Wednesday’s figures, Reeves said: “I know families across Britain who are worried about bills will welcome this fall in inflation.”
Mel Stride, the shadow chancellor, welcomed the fall in inflation but took aim at Reeves’ policies, saying: “With unemployment rising and the economy shrinking, families are paying the price for Labour’s bad choices.”
