UK inflation has dropped to its lowest level in over three years, with consumer prices rising just 1.7% in September, down from 2.2% in August. This decline has intensified market speculation that the Bank of England (BoE) will reduce interest rates at its upcoming policy meeting in November.
The Office for National Statistics (ONS) reported that the inflation rate has fallen below the BoE's target of 2% for the first time since 2021, prompting expectations of a potential cut in the main interest rate from 5% to 4.75%. Analysts had predicted a smaller drop to 1.9%.
As a result, the British pound fell against the US dollar and the euro, reflecting investor sentiment regarding future monetary policy. Interest rate futures now suggest a 90% probability of two quarter-point rate cuts by the end of the year.
Economists believe that the BoE's Monetary Policy Committee is likely to vote for a rate cut next month, especially with the government budget details due on October 30. This drop in inflation is seen as beneficial for the UK Treasury, as it may ease government debt-related interest payments.
However, the timing of this decline poses challenges for low-to-middle-income households, as social benefits tied to September's inflation rate will see a smaller increase than if calculated based on expected higher rates in October.