Interest rates expected to fall as inflation hits eight-month low
Interest rates are set to be cut before Christmas after inflation fell to an eight-month low in November, economists have predicted, reports BritPanorama.
The Bank of England is widely expected to reduce borrowing costs to 3.75% from 4% when it announces its next decision on Thursday. This would bring borrowing costs down to the lowest rate since the beginning of February 2023.
Experts suggest that the Bank’s Monetary Policy Committee (MPC) will be encouraged by recent economic data to lower rates at its final meeting of the year. This follows the release of the latest inflation figures, which showed a more substantial drop in Consumer Prices Index (CPI) inflation than analysts had anticipated.
The CPI rate fell to 3.2% in November, down from 3.6% in October, according to the Office for National Statistics (ONS). This decline was primarily influenced by a decrease in food and drink inflation, which dropped to 4.2% from 4.9%, alongside easing prices for alcohol and tobacco.
Danni Hewson, head of financial analysis for AJ Bell, noted, “Although 3.2% is still way above the Bank of England’s target, it is expected to be the final piece in the puzzle which will enable rate setters to deliver their own festive gift to borrowers with an interest rate cut on Thursday.”
The Bank is tasked with achieving a 2% inflation target. Hewson added, “There are still massive question marks about what 2026 will bring and markets don’t expect the Bank of England to cut interest rates more than once or twice over the next year, so borrowers hoping to see a return to the ultra-low levels many people had become used to will have to adapt.”
James Smith, developed market economist for ING, described the sharp drop in November inflation as a signal for a December rate cut. He commented, “Christmas has come early for the doves at the Bank of England, with inflation coming in well below expectations in November.”
Smith does anticipate that inflation will rise again in December, partly due to seasonal increases in air fares. Nevertheless, he asserted that the latest drop in inflation aligns with a larger trend indicating that price pressures are easing, predicting headline inflation to approach 2% by May.
He forecasts another two cuts to interest rates in February and April next year.
Alongside falling inflation, the MPC is expected to consider other indications of economic cooling, including rising unemployment, slower wage growth, and stagnant economic growth.
This anticipated rate cut signals a potential shift in the UK monetary landscape, reflecting broader economic trends and potential challenges ahead. The delicate balancing act for the Bank of England continues, as it navigates between stimulating growth and controlling inflation.
