Fall In UK Inflation Sets Up BoE Interest Rate Cut

• The Bank of England is set to cut interest rates, after lower-than-expected inflation figures and signs of a weakening jobs market. Headline inflation slowed to 3.2% in November, from 3.6% in October, the Office for National Statistics said on Wednesday. That was the lowest since March and a much clearer drop than predicted by analysts, who had forecast a rate of 3.5%. The news comes only a day after labour market data from the ONS showed the unemployment rate rising to its highest level in over four years in October.
• The economy has struggled for growth in the second half of this year, after a sugar rush in the first quarter in which exporters rushed to get their goods to the U.S. before President Donald Trump could impose trade tariffs. The hangover from that, and the lingering uncertainty over the global economic outlook caused by Trump’s trade policy, has been severe.
• But at the same time, an unwelcome rise in inflation has stopped the Bank of England from cutting interest rates more quickly to support the economy. A raft of hikes in government-controlled prices, such as energy bills and rail fares, meant that inflation was rising for much of the year, leading it to peak at 3.8% in September. That was also partly due to companies passing on increases in labour costs due to a 6.7% hike in the National Living Wage and an increase in employers’ National Insurance contributions.
• Panmure Liberum chief economist Simon French said the wide range of goods and services now showing softening price trends showed that demand is now so weak that companies are having to absorb those price increases themselves instead. The government will be particularly relieved to have seen politically sensitive food prices, which have been a constant bugbear for the last couple of years, making the biggest contribution to the slowdown in inflation in November. Prices for clothing and footwear and for discretionary services such as restaurants and hotels also fell slightly.
• However, with the worst bout of inflation in half a century still fresh in everyone’s minds, it has been forced to keep the pace of policy easing “gradual and cautious”.
• Peel Hunt’s Pickering said that the scale of the slowdown could be enough to have some members of the Monetary Policy Committee voting for a half-point cut in the Bank Rate to 3.5% on Thursday. The consensus remains for a quarter-point cut to 3.75 %.

(Source: Politico)