In a surprising turn of events, the United Kingdom (U.K.) witnessed a significant decrease in inflation in October. This gave both the Bank of England (BoE) and Prime Minister Rishi Sunak a break. Annual consumer price inflation in the U.K. plummeted to 4.6 percent from September’s 6.7 percent, marking the smallest increase in two years. Investors responded by increasing their bets on BoE rate cuts in the coming year.
Market reaction
The drop in inflation had an immediate impact on the U.K. financial markets. Sterling experienced a slight decline against the dollar. Meanwhile, the FTSE 100 rose over 1 percent to reach its highest level in nearly a month. The mid-cap FTSE 250 also hit a two-month high. However, despite the positive shift, concerns about the economic outlook persist.
While the BoE’s forecasts had predicted a milder drop to 4.8 percent, the October reading of 4.6 percent surprised many. Despite the positive news, the central bank warns that reducing inflation in the UK could be challenging. The BoE projects a return to its 2 percent inflation target by late 2025, emphasizing a cautious approach to any further rate hikes.
The inflation data brings rare good news for Prime Minister Rishi Sunak, who pledged to halve price growth this year. Despite the drop, the U.K. retains the highest rate of consumer price growth among the Group of Seven nations.
Read: October sees larger-than-expected decline in U.S. inflation
Shifting the narrative
The National Institute of Economic and Social Research (NIESR) argues that this decrease resulted from BoE’s interest rate increases. Energy price changes also contributed to the decrease in inflation, emphasizing that controlling inflation is not the government’s sole responsibility.
Despite the fall in October, the UK maintains the highest rate of consumer price growth in Western Europe, with a 21 percent increase since the end of 2020.
BoE Chief Economist, Huw Pill, stresses that the expected fall in inflation in the U.K., just under 5 percent, is still too high. The Central Bank highlighted that it is not considering cutting interest rates even as the economy approaches recession. However, Investors are increasingly betting on BoE rate cuts next year.
The unexpected drop in inflation figures adds a new layer of complexity to the economic landscape. It has implications for monetary policy, market dynamics, and the political arena. As the U.K. grapples with the aftermath of the pandemic, the road to economic recovery appears both uncertain and challenging.
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