The UK’s annual inflation rate unexpectedly fell to 3.2%, down from 3.6% in October, marking the lowest level since March. This decline was largely driven by reduced food prices, notably in cakes, biscuits, and breakfast cereals, which typically witness price hikes during this time. Additionally, tobacco prices slightly eased, and there was a drop in women’s clothing prices. Economists had projected a smaller drop, forecasting a rate of 3.5%.
The sharp decline has spurred expectations that the Bank of England (BoE) will cut interest rates at its upcoming meeting, with markets anticipating a decrease from 4.0% to 3.75%. Previously, the BoE maintained interest rates in November, but the new inflation data suggests a possible rate cut as Governor Andrew Bailey indicated a willingness to consider reductions if inflationary pressures subside.
This inflation slowdown has already affected currency markets, with the British pound weakening against the US dollar and the euro. Analysts believe that easing inflation coupled with economic challenges may push the BoE to act decisively to support growth.
In the stock market, UK equities rebounded, particularly in the banking sector, with the FTSE 100 index rising by 1.7%, driven by gains in banking shares like HSBC, which jumped 3.8% following a brokerage upgrade. While this inflation decline offers some relief to consumers, the BoE warns that inflation is expected to remain above its 2% target until mid-2027 due to ongoing structural labor issues and regulated price increases. Nevertheless, the current data gives policymakers a crucial opportunity to adjust rates in response to the shifting economic landscape.
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