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The small drop in the inflation rate announced Wednesday morning – from 3.8 percent to 3.6 percent – is the latest sign that a quarter interest rate The reduction is expected before the end of 2025.
Bank of EnglandThe U.S. Monetary Policy Committee voted in early November to keep rates at 4 percent, but a final vote is pending until 2025 — on Dec. 18.
While BoE Governor Andrew Bailey spoke of a desire to see more data before committing to further cuts, this has been confirmed Inflation has decreased slightly This is the latest and greatest indicator that a rate cut is needed to get the economy moving once again.
Another big event is ahead before the voting: Rachel Reeves‘ Budget. But it is also expected to be similarly deflationary, meaning a rate cut seems almost certain.
Data showing a stable economy
At 3.8 per cent after two months – September data was below the expected 4 per cent – we have now seen inflation The return to levels last seen in June confirms analysts’ expectations that inflation has peaked. A minor concern will be food prices, which are rising again after a month of decline. The Food and Drink Federation explained the huge price increases, saying that “producers are paying almost 40 per cent more for ingredients and energy than in January 2020”. But the broader inflation picture points to a rate cut.
However, the BoE is not just focusing on inflation, and signs elsewhere also show that a kickstart is needed.
The housing market has been far from firing on all cylinders, with many industry experts saying buyers and sellers alike are waiting for more certainty about any tax implications given everything the past few months have seen. report on mansion tax The Conservatives claim they would abolish stamp duty altogether – A move supported by Kirsty Allsopp,
More recently, economic data showed that the U.K. GDP growth rate declined to just 0.1 percent Manufacturing output, in particular, has declined in the last three months.
Factor Job vacancies falling to lowest level annual rate Unemployment has reached 5 percent This is the first time since Covid and it is clear that businesses are no longer investing at the required level, just as people are not moving or spending as much as required.
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Budget details are important
Given the factors highlighted above, it would not have been surprising if the BOE had pre-empted some recent data by cutting rates on November 6. In fact, that’s almost what they did – the vote was split 6-5, with Governor Bailey casting the deciding vote to stay rather than rotate.
Perhaps the biggest reason behind that apparent caution was the budget, and the lack of clarity on what to expect.
That said, tax increases on individuals and higher costs for businesses are generally deflationary.
“The upcoming budget is likely to include measures designed to reduce inflation, particularly around things like energy prices, while the overall degree of fiscal consolidation is also likely to weigh on growth and inflation over the medium term,” said Luke Bartholomew, an economist at Aberdeen.
As mentioned, it is not entirely clear what is going to happen and any surprises could still have an adverse effect.
“If Rachel Reeves’s upcoming budget includes policies that could be seen as inflationary, she may make rate-setting decisions that she needs to take a little more time to see how the economy copes with the Chancellor’s measures,” warned Danny Hewson, head of financial analysis at AJ Bell. “It is also notable that the ONS points to an increase in factory gate prices, as many producers as well as retailers seek to offset costs through government measures such as increases in employer national insurance payments.
“The decline in inflation for the first time since March is good news, but for many households it may not feel like it, given this is the most expensive time of the year. Next week’s scheduled fiscal event needs to deliver more than just savings for the treasury.”
Savers, Homeowners and Businesses
It’s important for families to remember that interest rates are a sham: While lowering them is good for lower mortgages or loan repayments that aren’t fixed, it also means earning less interest on savings.
So the first call of action should be to ensure that cash is saved in the best earning accounts whenever possible.
Mortgage rates have been declining over the past few weeks, but if you’re one of the hundreds of thousands due to renew in the final months of 2025, experts don’t recommend waiting for an interest rate cut. This is because products are priced using swap rates – future expectations of interest rates – rather than current rates, so prices will be set in advance. Since many lenders now have deals under 4 percent, it’s wise to act early.
And for businesses, while interest rate cuts encourage investment and hiring, the Budget will again have a greater impact here. The British Chambers of Commerce has repeatedly called for firms not to be overtaxed – and a recent study shows Half may be set to raise prices If the Budget increases hiring costs, it could certainly mean another round of rising inflation.