In a significant development for the UK economy, the annual rate of inflation fell to 3.2% in November, increasing the likelihood of an imminent interest rate cut by the Bank of England.
Inflation Cools Faster Than Expected
The latest data from the Office for National Statistics shows the Consumer Prices Index (CPI) measure of inflation eased from 3.6% in October to 3.2% last month. This decline was more substantial than financial analysts in the City had predicted, who had forecast a modest drop to 3.5%.
The sharper-than-expected cooling in the pace of price rises strengthens the argument for the Bank of England's Monetary Policy Committee to reduce the cost of borrowing when it meets this Thursday.
Pressure Mounts on the Bank of England
Financial markets had already priced in a high probability of a rate cut this week, with predictions of a 90% chance of a quarter-point reduction even before the release of this encouraging inflation snapshot. The case for action is being built on a combination of factors:
- Weaker economic growth, including an unexpected contraction in October.
- Rising unemployment across the country.
- Easing inflationary pressures as shown by the November data.
Threadneedle Street, the Bank's headquarters, is now widely expected to announce a cut to its base rate on Thursday, providing relief to mortgage holders and businesses.
Budget Measures and Economic Headwinds
Chancellor Rachel Reeves made tackling the cost of living a central pillar of last month's autumn budget. Her package included £26bn in tax increases aimed at repairing public finances and funding the end of the two-child benefit cap.
The Bank of England has indicated that the Chancellor's measures—which include relief on energy bills, prescription charges, and fuel duty—could reduce headline inflation by as much as half a percentage point next year.
However, the economic landscape remains fragile. Recent figures revealed the economy shrank in October, as consumer spending faltered amid pre-budget speculation over tax changes. The manufacturing sector, particularly car production, also struggled to recover from a cyber-attack on Jaguar Land Rover.
This week's decision by the Bank of England will therefore be a crucial moment, balancing the fight against inflation with the need to support a faltering economy.
