UK inflation cools to 3.6% in October, boosting chance of a Christmas rate cut
News Summary
The U.K.'s inflation rate cooled to 3.6% in October, down from 3.8% in September, matching economists' expectations. Core inflation also eased to 3.4% from 3.5%. Grant Fitzner, chief economist at the ONS, attributed the slowdown primarily to lower gas and electricity prices, following changes in the Ofgem energy price cap, and falling hotel costs, despite an uptick in food prices. Chancellor Rachel Reeves welcomed the fall in inflation, stating that the upcoming Autumn Budget next week will include measures to further bring down prices, cut national debt, and reduce NHS waiting lists. Economists widely anticipate a 25-basis-point interest rate cut by the Bank of England in December, with markets pricing in an 80% chance, driven by cooling inflation and persistently weak economic growth of just 0.1% in Q3. Analysts are keenly observing the Autumn Budget for potential tax changes or energy bill adjustments, which could significantly influence the inflation trajectory into 2026.
Background
The U.K. has been grappling with persistent inflationary pressures and sluggish economic growth, leading to its long-term borrowing costs being the highest among G7 nations, with the 30-year gilt yield trading well above the critical 5% threshold. The Bank of England had previously forecast inflation to peak at 4% in September, double its target, before gradually cooling into next year. Prior to this inflation data release, market expectations were already leaning towards a potential rate cut by the central bank before year-end to address the lackluster economic growth. Chancellor Rachel Reeves, representing the Labour government that took office in 2024, is preparing for her first Autumn Budget, under pressure to stabilize the economy and deliver on election promises.
In-Depth AI Insights
What are the true underlying motivations for a Bank of England rate cut? - Superficially, a rate cut appears a “natural” response to cooling inflation and weak growth. However, given the U.K.'s highest G7 long-term borrowing costs and persistently weak productivity, the BoE might be under implicit pressure from the government to stimulate economic activity, even if it entails a risk of inflation resurgence. - An early rate cut could also provide some buffer for any fiscal tightening measures Chancellor Rachel Reeves might announce in the Autumn Budget, preventing an excessive drag on the economy and garnering political goodwill. Is the long-term economic impact of the Autumn Budget being underestimated? - Yes, market focus on rate cuts may overshadow the deeper, structural implications of the Autumn Budget. If the budget contains substantive adjustments to VAT or green levies, while providing short-term disinflationary relief, these policies could, in the long run, impact investment attractiveness in specific sectors or alter consumer spending patterns. - Furthermore, should the government opt for more aggressive fiscal stimulus (e.g., via NHS waiting list cuts or specific industry support), this could create a subtle tug-of-war with the central bank's monetary policy objectives, influencing the long-term appeal of U.K. assets. What structural issues underpin the U.K.'s "mixed" economic picture? - Despite easing inflation, the persistent low growth and weak productivity are deeper structural ailments. This is not merely a cyclical issue but reflects post-Brexit challenges in trade relations, labor market skill mismatches, and underinvestment. - BoE rate cuts and government budget adjustments may only be short-term palliatives, failing to address these fundamental problems. If these structural impediments remain unresolved, the U.K. economy could face a prolonged period of “low growth, high volatility,” placing sustained pressure on sterling and U.K. gilts.