LONDON (AP) — Inflation in the U.K. as measured by the consumer prices index eased back to its lowest level in more than two years, official figures showed Wednesday, in a development that stoked speculation that the Bank of England may start cutting interest rates sooner than expected.
The Office for National Statistics said that inflation dropped to 3.9% in the year to November, its lowest level since September 2021, from 4.6% the previous month. That decline was bigger than anticipated in financial markets.
The agency said the biggest driver for the fall was a decrease in fuel prices after an increase at the same time last year. The decreasing rate in food price inflation also contributed to the decline.
The sharp drop has fueled expectations that the Bank of England, which sets interest rates in order to hit a 2% target, may move to reduce borrowing rates possibly in the first half of 2024.
The pound dropped 0.6% to $1.2650, a sign that traders think the central bank may look to cut rates soon, which would reduce relative returns for holders of the currency.
“The Bank has been loath to put a timetable on rate cuts in 2024, but this clearly raises the prospect of the Bank being in a position to ease policy in the first half of the year, rather than later,” said Neil Wilson, chief markets analyst at Finalto. “At least it will prompt the market to buy into this idea.”
That's a marked change from last week when the Bank of England left its main interest rate at a 15-year high of 5.25%, where it has stood since August following the end of nearly two years of hikes. Bank Gov. Andrew Bailey said that interest rate policy would likely have to remain “restrictive for an extended period of time."
The Bank of England has managed to get inflation down from a four-decade high of more than 11%, but still has a way to go to get to its target of 2%.
Higher interest rates targeted a surge in inflation, first stoked by supply chain issues during the coronavirus pandemic and then Russia’s full-scale invasion of Ukraine, which pushed up food and energy costs.
While the interest rate increases have helped in the battle against inflation, the squeeze on consumer spending, primarily through higher mortgage rates, has weighed on the growth of the British economy. There are growing worries that rates will stay high for too long, unnecessarily damaging the economy.
However soon the Bank of England decides to cut rates, it’s very likely that relatively high borrowing rates and low economic growth will be the backdrop for next year’s general election. That’s also a concern for the governing Conservative Party, which opinion polls say is way behind the main opposition Labour Party.