UK inflation slowed much more sharply than expected in November to 3.9 per cent, according to official data that triggered a surge of market speculation that the Bank of England (BoE) will cut interest rates in the first half of 2024.
Sterling fell steeply while stocks and government bonds rallied on Wednesday after the Office for National Statistics (ONS) said the consumer prices index had risen last month by the least since September 2021.
The increase was well below the 4.4 per cent year-on-year reading predicted by economists in a Reuters poll, and down from 4.6 per cent in October, as inflation was pulled lower by prices of food, fuel and recreation.
Core inflation, which excludes energy and food prices, rose by 5.1 per cent in the year to November, compared with 5.7 per cent in the previous month, the ONS said. That was also comfortably below economists’ forecasts.
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The pound fell by 0.54 per cent against the dollar in early London trading to $1.266. The FTSE 100 rose to its highest point since May, and was recently trading up 1 per cent.
Meanwhile, the yield on rate-sensitive two-year gilts dropped 0.17 percentage points to 4.12 per cent, the lowest since late May. Yields on benchmark 10-year gilts dropped 0.12 percentage points to 3.53 per cent. Yields move inversely to prices.
The ONS figures added to speculation about when the BoE’s Monetary Policy Committee will start cutting the cost of borrowing after it raised rates to a 15-year high in a bid to tame high inflation.
Markets fully priced in a quarter-point rate cut for May after the statistics were published. According to London Stock Exchange Group data, traders are also pricing in a roughly 50 per cent chance that the BoE will lower rates by the same amount in March.
Samuel Tombs, economist at the consultancy Pantheon Macroeconomics, said the “surprisingly sharp fall in CPI inflation reinforces the likelihood that the MPC will begin to reduce Bank rate in the first half of 2024, far earlier than it has been prepared to signal so far”.
“Looking ahead, CPI inflation looks set to continue to fall more quickly than the MPC predicted in November,” he added.
Meanwhile, UK house prices fell at the fastest pace in more than a decade in the year to October, with the biggest drops in London, according to official data that points to the impact of high interest rates on the property market.
Average UK house prices declined by 1.2 per cent in the 12 months to October 2023, down from a revised fall of 0.6 per cent in September, the Office for National Statistics said on Wednesday. It was the largest drop since October 2011 and left the average house price at £288,000, some £3,000 lower than 12 months ago.
London was the UK region with the biggest contraction of 3.6 per cent, the largest fall since August 2009. But the capital remained the most expensive part of the country, with the average home costing just over £515,500. – Copyright The Financial Times Limited 2023
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