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Surprise inflation fall fuels prospect of base rate cut

Joanna Faith
Written By:
Joanna Faith

UK inflation unexpectedly fell to a three-year low in December, putting the possibility of a base rate cut firmly on the table.

The Consumer Prices Index (CPI) measure of inflation fell to 1.3% last month, down from 1.5% in November, according to figures from the Office for National Statistics (ONS).

Cheaper women’s clothing and hotel stays were the main contributors to the drop.

It was the fifth month in a row that CPI came in below the Bank of England’s 2% target.

Emma-Lou Montgomery, associate director for personal investing at Fidelity International, said: “These latest figures will fuel speculation about the likelihood of a cut in interest rates in the coming months, with those at Threadneedle Street under pressure to stimulate the economy following months of uncertainty towards the end of 2019.

“Many had hoped for a rally following the outcome of December’s election, but from what we’ve seen so far this hasn’t necessarily materialised.”

Ayush Ansal, chief investment officer at Crimson Black Capital, said: “When the Bank’s Monetary Policy Committee meets later this month, the possibility of an interest rate cut will now be firmly on the table.

“Dovish comments from several MPC members earlier this month had already prompted many marketwatchers to price in a rate cut, and the absence of inflationary pressure could give the Bank’s ratesetters a free hand to cut.

“With the UK economy stuttering, the Bank may conclude that it’s better to get ahead of the curve on rates rather than risk playing catch up.”

Earlier this week, a Bank of England policymaker hinted that a cut to the central bank’s key base rate from 0.75% to 0.5% could be imminent.

Gertjan Vlieghe told the Financial Times he would consider voting for a cut depending on economic performance since the general election on 12 December.

“I really need to see an imminent and significant improvement in the UK [economic] data to justify waiting a little bit longer,” he told the FT.

Vlieghe’s comment follows similar remarks from outgoing BoE governor Mark Carney and Silvana Tenreyro, another member of the BoE’s Monetary Policy Committee.