Decrease in inflation increases raises prospects of interest rate cut

The UK’s inflation rate decreased to its lowest point for more than three years in December, adding weight to the notion that interest rates could be cut.

Decrease in inflation increases raises prospects of interest rate cut

The inflation rate decreased to 1.3% last month, down from 1.5% in November, this was mainly due to the fall in the price of women’s clothing and hotel room prices.

December’s inflation rate was the lowest since November 2016.

Analysts believe that this increases the chances of a rate cut, with inflation falling below the Bank of England’s target of 2%.

Melissa Davies, an economist at Redburn, said: “Very soft UK inflation data for December leaves the door wide open for a Bank of England rate cut on 30 January.”

Market indicators suggest that there is a 60% chance of the interest rate being cut because at 1.3%, the official measure of consumer price inflation in the year to December was lower than expected and substantially below the 2% target. With the economy stagnating there is little sign of inflationary pressure in the near future.

It has since been assumed that the November contraction was a temporary period of weakness instigated by pre-election political uncertainty.

Analysts have therefore believed that there will be a recovery as businesses and consumers regain new-found confidence to spend and invest.

The risk the Bank of England’s Monetary Policy Committee (MPC) will have to contend with is that that hoped-for post-election recovery does not materialise, the BBC reports.

However, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, has said that members of the MPC could take the latest inflation figure with a pinch of salt. He said: “Half of the decline in the headline rate was driven by a sharp fall in volatile airline fares inflation.”

Mr Tombs expects inflation to rise to 1.6% in the first three months of 2020, and this could mean enough MPC members will decide to wait rather than voting to cut rates.

Emma-Lou Montgomery, associate director for personal investing at Fidelity International, said the inflation data painted a bleaker picture for the UK economy than before.

She said: “Today’s UK CPI figures simply add to the growing sense of unease many feel when considering the outlook for the UK economy, with the rate of inflation continuing to lag well below the Bank of England’s target of 2%.”

Ms Montgomery urged that a cut would ease the finances of borrowers, but at the same time, create a tougher environment for savers.

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