Inflation down: will there be an interest rates cut?

Speculation about a cut in interest rates has intensified after the UK’s inflation rate sank to its lowest level for more than three years.

Commentators said the chances of a rates cut at the end of January are higher after the rate of inflation dropped to 1.3% last month, down from 1.5% in November. The fall was met with surprise by City economists, who had expected the figure to remain steady.

The Guardian says the drop was “fuelled by struggling retailers offering a wider range of discounts in December”.

It comes hot on the heels of GDP data that had already sparked speculation of a cut in rates.

Melissa Davies, from the stock broker Redburn, said that “very soft UK inflation data for December leaves the door wide open for a Bank of England rate cut on 30 January”, when the Bank of England Monetary Policy Committee (MPC) is next due to meet.

Andy Verity, the BBC’s economics correspondent, said “city traders who spend their working lives trying to anticipate moves in interest rates are convinced” the Bank will cut the official interest rate.

Michael Sanders, an MPC member who has voted for a rate cut at the last two meetings, said yesterday: “Risk-management considerations favour a relatively prompt and aggressive response to downside risks at present.”

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However, Ruth Gregory, the senior UK economist at Capital Economics, was more cautious. She said the figures “might be enough to tip the balance on the MPC towards an imminent rate cut”, but added that “everything now depends on the economic news over the coming weeks”.

Matthew Ryan, a strategy analyst at Ebury, has also encouraged the public to not get too carried away. “While we acknowledge that the chances of a cut later this month have undoubtedly increased in the past few days, we think that the market has slightly overreacted,” he said.

“It is worth stressing that the three BoE members... all noted that additional data would be required before they decide on whether to vote for lower rates.”