LONDON (AP) — Inflation in Britain has fallen to the lowest level in more than three years, official figures showed Wednesday. A decline that has reinforced market expectations that the Bank of England will cut rates at its next policy meeting in November.
The Office for National Statistics said consumer prices rose 1.7% in September, compared with 2.2% the month before, largely due to lower airfares and petrol prices. But price pressures were lower across the board, even in the services sector, which is worrying policymakers as this sector accounts for around 80% of the UK economy.
The drop was bigger than the 1.9% that analysts expected, and means inflation is below the central bank’s target of 2% for the first time since 2021.
As a result, the bank’s interest rate panel is expected to further cut the key interest rate from 5% to 4.75% when it meets again in early November. It previously cut borrowing costs in August, the first reduction since the early days of the coronavirus pandemic in early 2020.
“A quarter-point rate cut in November is now effectively a foregone conclusion, and this report certainly makes the path to a successive cut in December much clearer,” said Luke Bartholomew, deputy chief economist at abrdn, formerly Aberdeen Asset Management.
Central banks around the world dramatically increased borrowing costs from near zero during the coronavirus pandemic, as prices began to rise, first due to supply chain problems and then because of Russia’s large-scale invasion of Ukraine, which sent energy costs soaring.
As higher interest rates help reduce inflation from the highest levels in recent years by making it more expensive for businesses and consumers to borrow, they have started cutting interest rates. For example, the US Federal Reserve cut its key interest rate last month, while the European Central Bank, which sets monetary policy for the twenty countries that use the euro, is expected to cut again on Thursday.
The bank is widely expected to cut borrowing costs again at its next meeting in November, especially as it will have details of the government budget on October 30.
The new Labor government has said it needs to plug a 22 billion pound ($29 billion) hole in public finances and has signaled it may have to raise taxes and cut spending, which would likely weigh on short-term prospects term for the economy. British economy and put downward pressure on inflation.
September’s lower inflation rate is a boon for Treasury chief Rachel Reeves as she prepares for her first budget, as many of the government’s annual benefits are linked to September’s inflation rate. The prospect of lower interest rates in the coming months is also welcome, as this will reduce the government’s debt-related interest payments and potentially give it more room to maneuver.
However, it is bad timing for many of Britain’s most vulnerable households as benefits are based on inflation measured in September. If they were linked to the October figure, when inflation is widely expected to rise due to a rise in domestic energy bills, they would have received more.
“This temporary decline is ill-timed for millions of low- to middle-income families, as it will result in lower benefit increases next year,” said Lalitha Try, an economist at the Resolution Foundation.
