LONDON (AP) — Inflation within the U.K. has fallen to its lowest level for greater than three years, official figures showed Wednesday, a drop that has cemented market expectations that the Bank of England will lower rates of interest at its next policy meeting in November.
The Office for National Statistics said consumer prices rose 1.7% in September, down from 2.2% the previous month, largely because of this of lower air fares and petrol prices. But price pressures were lower across the board, even within the services sector, which has anxious policymakers because it accounts for around 80% of the British economy.
The decline was larger than the 1.9% analysts had anticipated, and signifies that inflation is below the central bank’s goal rate of two% for the primary time since 2021.
Because of this, the bank’s rate-setting panel is anticipated to further reduce its essential rate of interest when it meets again in early November to 4.75% from 5%. It previously cut borrowing costs in August, the primary reduction because the early days of the coronavirus pandemic in early 2020.
“1 / 4-point rate cut in November is now effectively a done deal, and this report actually makes the trail to a consecutive cut in December much clearer,” said Luke Bartholomew, deputy chief economist at abrdn, formerly Aberdeen Asset Management.
Central banks world wide dramatically increased borrowing costs from near zero in the course of the coronavirus pandemic when prices began to shoot up, first because of this of supply chain issues built up after which due to Russia’s full-scale invasion of Ukraine which pushed up energy costs.
With higher rates of interest helping to cut back inflation from multi-year highs by making it dearer for businesses and consumers to borrow, they’ve began cutting rates of interest. The U.S. Federal Reserve, for instance, slashed its essential rate last month, while the European Central Bank, which sets monetary policy for the 20 countries that use the euro, is anticipated to chop again on Thursday.
The bank is widely expected to cut back borrowing costs again at its next meeting in November, especially as it’s going to have details of the federal government’s budget on Oct. 30.
The brand new Labour government has said that it must plug a 22 billion pound ($29 billion) hole in the general public funds and has indicated that it can have to lift taxes and lower spending, which might likely weigh on the near-term outlook for the British economy and put downward pressure on inflation.
The lower inflation rate in September is a boon for Treasury chief Rachel Reeves as she prepares to deliver her first budget, since many annual advantages from the federal government are linked to September’s rate. The prospect of lower borrowing rates within the months ahead can also be welcome as it’s going to reduce the federal government’s debt-related interest payments and potentially give her more leeway.
Nonetheless, it’s bad timing for a lot of probably the most vulnerable households within the U.K., since advantages are based on the inflation rate measured in September. Were they linked to the October rate, when inflation is widely expected to rise because of this of a rise in domestic energy bills, they might have gotten more.
“This temporary fall is badly timed for thousands and thousands of low-to-middle income families as it’s going to lead to a lower increase of their advantages next 12 months,” said Lalitha Try, economist on the Resolution Foundation.