LONDON — Recent data revealed a significant decline in inflation in the United Kingdom, reaching its lowest point in over three years, prompting speculation that the Bank of England may implement interest rate cuts in the upcoming policy meeting.
The Office for National Statistics reported that consumer prices increased by only 1.7% in September, a notable decrease from 2.2% in August. This drop can be primarily attributed to reduced costs in air travel and petrol.
The inflation rate fell more than the expected 1.9%, placing it below the central bank’s target of 2% for the first time since 2021, which has led to heightened anticipation for further interest rate reductions.
Financial experts predict that the bank’s policy committee will likely cut the benchmark interest rate to 4.75% from its current level of 5% during their meeting set for early November. This would follow an earlier rate cut in August, marking a significant shift since the onset of the coronavirus pandemic in early 2020.
Luke Bartholomew, the deputy chief economist at abrdn, expressed confidence, stating that a quarter-point reduction in November appears inevitable, and the report enhances the prospects of an additional cut in December.
Throughout the pandemic, central banks worldwide heightened borrowing costs from record lows, responding to rapidly rising prices stemming from supply chain disruptions and escalated energy costs following Russia’s invasion of Ukraine. As inflation rates have gradually declined from record highs, a trend of rate cuts has emerged.
The anticipation for another rate reduction at the November meeting is further bolstered by the upcoming release of the government’s budget on October 30.
The newly elected Labour government faces the challenge of addressing a £22 billion (approximately $29 billion) deficit in public finances. They have signaled the potential need for tax increases and spending cuts, which could influence the immediate economic outlook for the UK and exert downward pressure on inflation.