UK inflation falls to its lowest level in over three years, cementing expectations of a further rate cut

LONDON (AP) — Official figures showed Wednesday that inflation in the United Kingdom fell to its lowest level in more than three years. This decline has cemented market expectations that the Bank of England will cut interest rates at its next policy meeting in November.

According to the Office for National Statistics, consumer prices rose 1.7% in September compared to 2.2% the previous month, largely due to lower airfare and petrol prices. But price pressures were lower overall, even in the services sector, which worries policymakers because it accounts for around 80% of the UK economy.

The decline was bigger than the 1.9% expected by analysts and means inflation is below the central bank’s target rate of 2% for the first time since 2021.

Therefore, the bank’s interest rate setting committee is expected to further cut the key interest rate from 5% to 4.75% when it meets again in early November. It before Reducing borrowing costs in Augustthe first reduction since the early days of the coronavirus pandemic in early 2020.

“A quarter-point rate cut in November is now effectively a done deal, and this report certainly makes the path to back-to-back cuts in December much clearer,” said Luke Bartholomew, deputy chief economist at abrdn, formerly Aberdeen Asset Management.

Central banks around the world dramatically increased borrowing costs from near zero during the coronavirus pandemic as prices began to rise, first because of supply chain problems and then because of Russia’s full-scale invasion of Ukraine, which drove up energy costs .

Because higher interest rates help lower inflation, which has been high for several years by making it more expensive for businesses and consumers to borrow, they have begun to lower interest rates. The US Federal ReserveFor example, the European Central Bank cut its key interest rate last month, while the European Central Bank, which sets monetary policy for the 20 countries that use the euro, is expected to make another cut on Thursday.

The bank is widely expected to cut borrowing costs again at its next meeting in November, particularly as government budget details are due on October 30.

The new Labor government has said it needs to plug a 22 billion pound ($29 billion) hole in the public finances and has hinted it may have to raise taxes and cut spending, which will short-term outlook would likely weigh on the UK economy and put pressure on inflation.

September’s lower inflation rate is a boon for Finance Minister Rachel Reeves as she prepares to deliver her first budget, as many of the government’s annual benefits are tied to the September rate. The prospect of lower lending rates in the coming months is also encouraging, as it will reduce the government’s debt-related interest payments and potentially give it more flexibility.

However, it is bad timing for many of the UK’s most vulnerable households as benefits are based on the inflation rate measured in September. If they were pegged to the October rate, when inflation is widely expected to rise due to rising domestic energy bills, they would have gotten more.

“This temporary decline comes at a bad time for millions of low- and middle-income families, as it will lead to a smaller increase in their benefits next year,” said Lalitha Try, an economist at the Resolution Foundation.