Fall in UK inflation raises prospects of interest rate cut

London tech

UK’s inflation rate fell to its lowest for more than three years in December, increasing speculation that interest rates could be cut.

The rate dropped to 1.3% last month, down from 1.5% in November, partly due to a fall in the price of women’s clothes and hotel room costs.

December’s inflation rate was the lowest since November 2016.

Analysts said it raised the chances of a rate cut, with inflation below the Bank of England’s target of 2%.

“Very soft UK inflation data for December leaves the door wide open for a Bank of England rate cut on 30 January,” said Melissa Davies, an economist at stock broker Redburn.

The Bank’s main interest rate is used by banks and other lenders who set borrowing costs.

It affects everything from mortgages to business loans and has a big effect on the finances of individuals and companies.

Earlier on Wednesday, Michael Saunders, one of the rate setters on the Bank’s Monetary Policy Committee (MPC), reiterated his view that borrowing costs should be lowered.

“It probably will be appropriate to maintain an expansionary monetary policy stance and possibly to cut rates further, in order to reduce risks of a sustained undershoot of the 2% inflation target,” he said.

Last week, two other rate setters and Bank governor Mark Carney also suggested that rates could be cut, depending on how the economy performs.

On Sunday, MPC member Gertjan Vlieghe told the Financial Times he would consider voting for a rate cut depending on how the economy has performed since the December election.

However, members of the MPC could take the latest inflation figure with a pinch of salt, said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

“Half of the decline in the headline rate was driven by a sharp fall in volatile airline fares inflation,” he said.

He expects inflation to rise to 1.6% in the first three months of 2020, and this could mean enough MPC members will decide to wait rather than voting to cut rates.

Emma-Lou Montgomery, associate director for personal investing at money manager Fidelity International, said the inflation data painted a bleaker picture for the UK economy than before.

“Today’s UK CPI figures simply add to the growing sense of unease many feel when considering the outlook for the UK economy, with the rate of inflation continuing to lag well below the Bank of England’s target of 2%.”

A cut would ease the finances of borrowers, but create a tougher environment for savers, she added.