Shock fall in inflation paves road for Bank of England to slash interest rates twice in boost for millions of borrowers before Christmas _ Hieuuk
A sharper than expected fall in inflation has paved the way for the Bank of England to cut interest rates twice more before Christmas in a boost for millions of borrowers.
Inflation dropped to 1.7 per cent in September according to the Office for National Statistics (ONS), down from 2.2 per cent the month before.
The ONS said lower air fares and petrol prices were the biggest drivers of the fall.
It is the first time inflation has dropped below the Bank of England’s 2 per cent target since April 2021 and marks another milestone in the cost-of-living crisis which had seen inflation soar into double digits since then.
Lower interest rates lead to cheaper costs for mortgages and other borrowing.
A sharper than expected fall in inflation has paved the way for the Bank of England (seen) to cut interest rates twice more before Christmas
The dual boost for borrowers has been put down largely to lower air fares and petrol prices
Gabriella Dickens, G7 economist at AXA Investment Managers, said the inflation news would ‘all but seal the deal’ for a further cut in interest rates at the Bank’s next meeting in November.
However, the Budget later this month could prove the ‘final hurdle’, said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.
‘Rate-setters will want to assess the inflationary impact of any measures announced’ before cutting rates, Mr Thiru said. Interest rates were cut from 5.25 per cent to 5 per cent in August – the first reduction in four years.
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The Bank has adopted a cautious tone on the prospect of further cuts since then, though governor Andrew Bailey recently indicated it could be ‘a bit more aggressive’ if inflation continues to cool.
In the wake of the latest figures, markets see a 90 per cent chance that the Bank will cut by another quarter point in November and a 75 per cent likelihood of repeating that in December. Some experts think it could continue to cut rapidly after that.
James Smith, developed markets economist at ING Bank, said: ‘We expect a cut in December and at every meeting until rates reach 3.25 per cent next summer.’
Expectations of Bank of England rate cuts have already prompted lenders to bring down the fixed rate deals they offer.
More recently, fears the Bank would proceed more slowly have brought that trend ‘juddering to a stop and in some cases going into reverse’, said David Hollingworth, associate director at L&C Mortgages.
‘If the better-than-expected inflation figures improve the market outlook for interest rates, it could therefore help to steady mortgage rates,’ he added.
