The drop in the UK’s inflation rate to 3.6% in October has significantly increased the likelihood of an interest rate cut in December.
Data from the Office for National Statistics, released yesterday, showed that core inflation – which excludes energy, food, alcohol, and tobacco – rose by 3.4% in the year to October, down from 3.5% in September.
Attention now turns to the chancellor’s Autumn Budget on Wednesday 26 November, with analysts watching closely to assess the potential impact of expected tax changes.
Peter Stimson, Director of Mortgages at the lender MPowered, commented: “Next week’s Budget is now the only barrier to a December base rate cut.
“The Bank of England’s prediction that inflation would peak in September has proved spot on, and October’s fall in CPI was bang on expectations.
“At 3.6%, CPI is still well above the Bank’s 2% target, but the direction of travel matters more. With wage growth cooling, the inflationary pressure is easing and headline inflation should gradually tick down further.
“This gives the Bank’s Monetary Policy Committee a free hand to cut its base rate to below 4% when it meets next month. With the UK’s economic growth slowing and nearly half of the committee voting for a rate cut in November, a December cut now looks a racing certainty – provided the Budget doesn’t throw a spanner in the works.
“Mortgage lenders have already responded to the changing outlook. Swap rates – which track future base rate expectations – ticked down at the end of October and this prompted a burst of competition on fixed rate mortgages as lenders trimmed their rates in an effort to grab a bigger slice of a market becalmed by pre-Budget uncertainty.
Stimson continued: “Swap rates have started to creep back up in recent days, so lenders are now likely to pause their rate-cutting until after the Budget. Assuming the Budget doesn’t derail everything, the market is still expecting two or possibly three further base rate cuts by the middle of next year. But that is far from certain, and we are already approaching the bottom of the interest rate cycle.”
The fall in inflation will be welcome news for consumers, particularly those hoping to take their next step onto the housing ladder, as it provides a greater sense of stability and confidence.
However, inflation still needs to move sustainably below the Bank of England’s two per cent target before we are likely to see more meaningful reductions in interest rates.
“Continued progress will be crucial in improving long-term affordability and helping people plan their next move with greater certainty,” said Nathan Emerson.
Isaac Stell, investment manager at Wealth Club, added: “Having remained elevated throughout the summer, it looks as if the inflationary descent is staring to gain momentum. The possibility of a pre-Christmas rate cut is now very much on the cards.”
