UK Inflation Hits Lowest in 2 Years... "Interest Rate Cut Expected in June Next Year"

October CPI Records 4.6%

UK's inflation rate for October has dropped to its lowest level in two years. With the inflation rate, which soared to the 11% range just a year ago, clearly easing, the market is now anticipating an interest rate cut in the first half of next year.

On the 15th (local time), the UK Office for National Statistics announced that the UK's October Consumer Price Index (CPI) recorded an annual rate of 4.6%, down 2.1 percentage points from the previous month (6.7%). This is the lowest level since October 2021 (4.2%). The month-on-month decline in the inflation rate was the largest since April 1992. Core inflation, excluding volatile energy and food prices, fell from 6.1% annually to 5.7% annually.

[Image source=EPA Yonhap News]

UK inflation surged to 11.1% last October due to the impact of the Ukraine war and other factors. Although the inflation peak has since started to slow down, the pace of deceleration was slower than expected, which has weighed on the UK economy.

While UK inflation remains higher compared to other major advanced economies, the Bank of England (BOE) has begun to be more concerned about the worsening economic outlook than inflation itself.

One foreign media outlet pointed out, "In the past, during periods of rapid interest rate hikes in the 1970s and 1980s, severe recessions accompanied them. Given that the effects of the aggressive rate hikes?14 times since last year?have yet to fully impact the real economy, there is growing caution within the BOE about the risk of an accelerating economic downturn."

The BOE held its benchmark interest rate steady at 5.25% for two consecutive meetings, including the one held earlier this month following September. Since December 2021, when it was the first among major European countries to begin tightening, the BOE has aggressively pursued tightening policies by raising rates 14 consecutive times over 1 year and 9 months. The current benchmark rate is the highest in 15 years.

The market largely believes that the rate hikes have ended. Julian Rapharg, Chief Market Strategist at Barclays Private Bank, said, "The UK economy is still facing stagflation (a state where economic stagnation and high inflation occur simultaneously), and the road ahead looks tough. It seems the BOE will keep rates on hold for several months."

Some in the market are also forecasting that rate cuts will begin in June next year, with three 0.25 percentage point cuts by the end of the year.