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UK Inflation Drops to 3.9% in November, Prompting Rate Cut Speculation
A sharp reduction in UK inflation triggers market shifts and discussion on early interest rate cuts by the Bank of England.
In a significant economic development, the UK's inflation rate fell to 3.9% in November, marking a considerable decline from October's 4.6%. This unexpected drop is influencing expectations for the Bank of England's monetary policy in 2024.
Surprising Decline In Inflation Rates
The latest data from the Office for National Statistics showed a year-on-year rise in the consumer prices index at its lowest since September 2021, significantly below the 4.4% forecasted by economists. This decrease was driven by reductions in the prices of food, fuel, and recreation. Core inflation, which excludes volatile energy and food prices, also saw a decrease, falling to 5.1% from the previous month's 5.7%, again surpassing economists' predictions.
Market Reactions And Monetary Policy Speculations
The inflation figures led to immediate market reactions, with the pound dropping against the dollar and the FTSE 100 experiencing a significant rise. These developments have intensified debates about when the Bank of England's Monetary Policy Committee (MPC) might begin to reduce interest rates, following their increase to a 15-year high as an anti-inflation measure. Economists like Samuel Tombs of Pantheon Macroeconomics anticipate the MPC might start reducing rates in the first half of 2024, earlier than previously indicated.
Comparative Global Inflation And Bank Of England's Stance
Despite the recent decline, the UK's inflation rate remains higher than those in the US and the EU. The Bank of England has been cautious about lowering rates, waiting for clear evidence of inflation aligning with their 2% target, particularly in the labor market. The MPC, noting high wage growth and persistent services inflation, sees these as indicators of domestic price pressures. However, recent data indicates some easing in these areas, hinting at possible shifts in the central bank's approach.
Political And Economic Perspectives
The new inflation data was welcomed by Chancellor Jeremy Hunt as a sign of reducing inflationary pressures, though he acknowledged the ongoing struggles of many families with high prices. Opposition Shadow Chancellor Rachel Reeves recognized the relief brought by the declining inflation but highlighted the continuous rise in prices and household bills, criticizing the government's economic management.
Markets are now fully pricing in a quarter-point rate cut by May, with a 50% chance of a similar reduction in March, reflecting a significant shift in monetary policy expectations.
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