Inflation Down - Base Rates to Follow?

Attention now turns to the chancellor’s Autumn Budget on Wednesday 26 November, with analysts watching closely to assess the potential impact of expected tax changes as the only barrier to a December base rate cut. 

 

The Bank of England’s prediction that inflation would peak in September has proved spot on, and October’s fall in CPI was bang on expectations. 

 

Whilst CPI is still well above the Bank’s 2% target, the direction of travel matters more. With wage growth cooling, the inflationary pressure is easing and headline inflation should gradually tick down further. This gives the Bank’s Monetary Policy Committee a free hand to cut its base rate to below 4% when it meets next month. With the UK’s economic growth slowing and nearly half of the committee voting for a rate cut in November, a December cut now looks a racing certainty – provided the Budget doesn’t throw a spanner in the works. 

Mortgage lenders have already responded to the changing outlook. Swap rates – which track future base rate expectations – reduced down at the end of October and this prompted a burst of competition on fixed rate mortgages as lenders trimmed their rates in an effort to grab a bigger slice of a market becalmed by pre-Budget uncertainty. 

 

However, inflation still needs to move sustainably below the Bank of England’s two per cent target before we are likely to see more meaningful reductions in interest rates.