The rise in the interest rate investors are charging the UK government to borrow money over 10 years hit a 16-year high in recent days, piling pressure on Chancellor Rachel Reeves to cut spending or raise taxes.
UK Inflation unexpectedly fell in December, a move that is likely fuel pressure on the Bank of England to cut interest rates again next month.
Inflation, as measured by the consumer prices index, was 2.5% in the year to December, the Office for National Statistics said on Wednesday, largely as a result of easing price pressures in the services sector, which accounts for around 80% of the British economy.
That was down from 2.6% the previous month. Economists had expected no change in the annual rate.
Although inflation has fallen, it remains above the Bank of England’s target of 2%.
If the Bank of England decides to cut its main interest rate from 4.75%, it could well ease the pressure in British government bond markets, which have been volatile in recent weeks.
The rise in the interest rate investors are charging the British government to borrow money over 10 years hit a 16-year high in recent days, piling pressure on Chancellor Rachel Reeves to cut spending or raise taxes in order to allay concerns.
Inflation is down from levels seen a couple of years ago. That comes after central banks raised borrowing costs after their near zero levels following the 2008 banking crisis and covering the corona virus pandemic period. Prices during the latter period started to shoot up, first as a result of supply chain issues and then because of Russia’s invasion of Ukraine which led to energy prices soaring.
Hopes for an interest rate drop
Commenting on the figures, Capital Economics’ deputy chief UK economist Ruth Gregory said: “While a lot of the surprisingly large fall in services inflation from 5.0% in November to 4.4% in December (CE forecast 4.8%, BoE 4.7%) was due to a very sharp fall in airfares, underlying price pressures still appear a bit more favourable than we had thought.
“Our forecast is that CPI inflation will rebound in January, perhaps to almost 3.0% and that inflation will be a bit higher than most expect in the first half of this year. But we expect it to drop below the 2% target next year as the persistence of inflation fades further.
“Overall, next Tuesday’s release of the wage growth figures for November will shed more light, but for now, we remain content with our forecast that the Bank will cut rates from 4.75% to 4.50% in February.”
Kyle Chapman, FX Markets Analyst at Ballinger Group said: “Policymakers will welcome the big unexpected drop in services inflation, and it underlines my view that the market is underestimating the pace of the BOE’s cutting path this year. Hotels were the largest downward contributor, however, and this has been a particularly volatile component.”
