UK Edition
The Bank of England is expected to start lowering interest rates within months after a surprise drop in inflation sparked a wave of bets on lower borrowing costs.
Consumer prices index (CPI) fell to a two-year low of 3.9pc in November, the Office for National Statistics (ONS) said, down from 4.6pc in October and well below analysts’ expectations of a fall to 4.3pc.
It marked the first time inflation has been below 4pc since September 2021.
The surprise good news prompted traders to ramp up bets on interest rate cuts, with markets now predicting a 50pc chance that the Bank could start lowering borrowing costs from March.
Markets are also betting rates will fall to 4pc by the end of 2024, compared to expectations of 4.25pc before Wednesday’s data.
The market moves ramp up pressure on Bank Governor Andrew Bailey and his colleagues, who have repeatedly sought to downplay hopes of imminent rate cuts in recent weeks.
Simon French, chief economist at Panmure Gordon, said: “Financial markets are now testing the Bank of England’s recent united front that it is too early to talk about rate cuts.”
Growing expectations that interest rates will soon fall sent ripples throughout the financial sector.
Government borrowing costs fell to an eight-month low and the pound slipped half a cent against the dollar. The FTSE 100 hit a three-month high.
Mortgage lender Generation Home announced plans to launch the first sub-4pc, five-year fixed-rate mortgage on the market since May.
Recent falls in swap rates - the interest banks charge each other to borrow - mean other lenders could follow in the coming weeks.
David Hollingworth, of L&C Mortgages, said: “We may well see the market start with a bang in the New Year.”
Barclays has already announced reductions across its fixed residential and buy-to-let mortgage range of as much as 0.43pc this week.
The sharp fall in inflation was driven by falling fuel prices and cheaper food costs.
Grant Fitzner, chief economist at the ONS, described the figures as “good news”, with a broad easing in price rises reflected in “lower inflation across the board”.
While the main driver was a reduction in petrol prices, which fell by 4.1p per litre between October and November, Mr Fitzner said: “We’ve also seen annual food prices continue to come down, led by cheaper bread and cakes, falling games, live music and other recreation prices, furniture and cheaper second-hand cars.
“So it was a range of factors.”
Chancellor Jeremy Hunt said: “With inflation more than halved we are starting to remove inflationary pressures from the economy.
“Alongside the business tax cuts announced in the Autumn Statement this means we are back on the path to healthy, sustainable growth.”
City economists now believe inflation could fall below 3pc by next Spring, with Nomura and ING predicting inflation will hit the Bank’s 2pc target by May.
Mr French said the risk that the UK could see higher inflation compared with other rich countries had “all but evaporated”.
He said food prices, which are currently driving a quarter of inflation, will continue to ease in the coming months.
Consultancy Cornwall Insight also said typical energy bills were likely to fall by hundreds of pounds next April.
The consultancy said the Ofgem price cap will fall to £1,660 by April, down from the £1,928 it will reach in January when bills are expected to rise by 5pc.
The energy consultancy also predicted a further decline to around £1,590 by July.
Similar forecasts were also made by analysts at Investec, who forecast that the annual average gas and electric bill will fall by £234 next year.
Measures of inflation that are closely watched by the Bank also fell in November, which will bolster bets on rate cuts next year.
Core inflation, which strips out volatile food and energy costs, dropped from 5.7pc to 5.1pc in November. Services inflation eased from 6.6pc to 6.3pc.
While all measures remain above the Bank’s 2pc target, Mr Fitzner told the BBC that the declines were significant: “I think [this] would be encouraging to not just to the Bank but other financial commentators out there watching these numbers.”
Economists have warned that attacks by Houthi rebels on commercial ships in the Red Sea could push up the price of petrol and other goods in the coming months.