Post by : Badri Ariffin

London: Consumer price inflation in the UK dropped more than anticipated in November, raising expectations that the Bank of England (BOE) will implement its fourth interest-rate reduction of the year this week amidst waning economic momentum.

According to the Office for National Statistics (ONS), the annual inflation rate fell to 3.2% in November from 3.6% in October, and it sits well below the projection of 3.5% by economists. This represents the least inflation level since March, indicating swifter-than-expected steps toward achieving price stability.

Market Response and Policy Outlook

Following the inflation data, the British pound weakened against the U.S. dollar, as investors ramped up their expectations for an imminent rate cut. The BOE's decision on this matter is expected to be revealed on Thursday following a policymakers' vote later this week.

Experts believe that the most recent figures significantly bolster the argument for monetary easing, noting that inflation has decreased more swiftly and from a lower peak than the BOE initially anticipated.

Economists Suggest Easing Path is Clear

Paul Dales, Chief UK Economist at Capital Economics, stated that inflation is diminishing “much faster than anyone expected,” hinting that borrowers may soon see the benefits of lower interest rates.

Likewise, Thomas Pugh, Chief Economist at RSM UK, remarked that November's figures effectively “secure” a rate reduction this week and may lead to further cuts early next year if inflation continues to decline through 2026.

Divided View Among Policymakers, Yet Shift in Momentum

The BOE paused its rate-cutting strategy in November following a tight 5–4 vote, citing persistent price pressures. Nonetheless, Governor Andrew Bailey has hinted that clearer signs of declining inflation could warrant renewed easing. Market predictions now lean towards him endorsing a cut this time.

While some policymakers express concern about persistent food and services inflation, others are pointing to escalating labor market weaknesses as a rationale for lowering borrowing costs.

Signs of Strain in Labor Market

Recent data from the ONS indicates a cooling job market, with the unemployment rate rising to 5.1%, close to a five-year peak, and private-sector wage growth tapering to 3.9%, down from 4.2%. These trends alleviate price pressures and reinforce the case for policy assistance.

Factors Behind Declining Inflation

Grant Fitzner, ONS Chief Economist, noted that dropping food prices—uncharacteristic for this season—were chiefly responsible for the significant dip in inflation. Services inflation also edged down slightly to 4.4%.

Additionally, recent government policies, including energy bill relief, frozen rail fares, and deferred fuel duty increases, are expected to further mitigate inflation in the near future.

Inflation has drastically decreased from a pandemic high of 11.1% in 2022, and despite a brief spike earlier this year, it appears to be on a consistent downward trajectory. The BOE is currently projecting inflation to hit 2.5% by late 2026.

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