In a significant development that exceeded market expectations, the UK’s inflation rate took a sharper than anticipated downturn in November, reaching 3.9%, the lowest annual level since September 2021. This decline surpassed forecasts by economists polled by Reuters, who had projected the headline consumer price index to ease to 4.4% from October’s 4.6% – itself a surprising dip to a two-year low.
The month-on-month headline CPI saw a 0.2% decrease, defying the consensus forecast of a 0.1% rise. Meanwhile, core CPI, which strips out volatile elements like food, energy, alcohol, and tobacco prices, registered at 5.1% annually, notably under the anticipated 5.6%.
This unexpectedly steep decline in inflation has sparked increased speculation that the Bank of England might implement interest rate cuts in 2024, a sentiment reflected in the substantial drop in British bond yields. The yield on the UK’s benchmark 10-year gilt plummeted to an eight-month nadir, falling 11 basis points to around 3.54%, with bond yields moving inversely to prices. Concurrently, the FTSE 100, the UK’s leading stock index, stood out as the only major European index in positive territory on Wednesday, climbing 0.8% in mid-morning trading.
The Office for National Statistics attributed the largest downward pressures to sectors such as transport, recreation, culture, and food and non-alcoholic beverages. Despite these trends, the Bank of England maintained a hawkish stance last week, holding its main interest rate at 5.25% and emphasizing the need for a prolonged period of restrictive policy. This announcement followed the Bank’s decision to halt a streak of 14 consecutive interest rate hikes in September, a move aimed at pulling inflation down from October 2022’s 41-year peak of 11.1% towards the Bank’s 2% target.
UK Finance Minister Jeremy Hunt welcomed the latest figures, stating that the country is making headway in alleviating inflationary pressures. He cited recent business tax cuts as a step towards fostering sustainable growth. However, Hunt acknowledged the ongoing challenges faced by many families due to high prices and emphasized the government’s focus on addressing cost of living concerns.
Despite these developments, the Bank of England has been consistently pushing back against market expectations of significant interest rate cuts in 2024, citing persistently high indicators of UK inflation persistence.
Economic experts have weighed in on the implications of these figures. Suren Thiru, economics director at ICAEW, referred to the drop in inflation as “startling,” suggesting it brings hope to households of easing price pressures. He speculated that the Bank of England might loosen its policy by autumn if economic conditions deteriorate and inflationary pressures continue to wane.
Richard Carter, head of fixed interest research at Quilter Cheviot, expressed cautious optimism, noting that despite the inflation reduction, the broader economic landscape remains fraught with challenges including stagnation and subdued growth prospects. The UK economy’s contraction in October and its stagnation throughout the third quarter underscore the difficulties of rebounding from a confluence of challenges, including the cost of living crisis, volatile energy markets, Brexit repercussions, and persistent productivity issues. These factors, Carter notes, have collectively dampened economic prospects and consumer confidence, painting a complex picture despite the recent glimmer of relief in inflation data.
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