Key Takeaways:
- UK inflation is the lowest since March, official data confirmed.
- Food, alcohol and tobacco prices put downward pressure on the Consumer Prices Index in November.
- FTSE 100 rose in anticipation of an interest rate cut by the Bank of England in its last meeting of the year.
UK inflation fell unexpectedly to 3.2% November, an eight-month low, teeing up the Bank of England to make a fourth and final rate cut for 2025 on Thursday.
The Consumer Prices Index rose by 3.2% in November, from 3.6% in October, and below FactSet forecasts for an increase of 3.6%.
Core inflation also fell, from 3.4% to 3.2% in November, which was also below forecasts.
The fall in inflation was largely driven by slowing food, beverage and tobacco prices, the UK Office for National Statistics said. UK inflation is now at its lowest level since March.
“Today’s UK CPI figures serve as evidence that the disinflationary process in the UK remains alive and well,” says Morningstar economist Grant Slade.
“CPI inflation of 3.2% in the 12 months to November surprised us to the downside, with annual price growth slowing by a significant 0.4% month on month. Core inflation also fell by 0.2% to 3.2% in November, pointing to a further step-down in the extent of demand driven inflationary pressure in the UK economy.
“This is a pleasing outcome for the Bank of England which we think—in combination with labor market data weak labor market data earlier this week—now has a clear pathway to delivering a 25 basis point rate cut tomorrow.”
Markets had expected inflation to stay steady at 3.6%, and greeted this morning’s data positively, with the FTSE 100 rising more than 1% as the data supported the expectation of an interest rate cut. The pound also fell on the data release.
Nevertheless, inflation is still above the Bank of England’s 2% annual inflation target. The news also comes amid higher unemployment data in the UK, which showed joblessness up to 5.1% in the three months to the end of October—a 10-year high if exceptional pandemic unemployment data is excluded.
Will The Bank of England Cut Rates Again This Week?
Markets now expect a 0.25 percentage point cut from the Bank of England when its monetary policy committee announces its final rates decision for 2025 on Thursday, which would lower the UK’s interest rates to 3.75% from 4%. The UK central bank held interest rates in November, but cut interest rates by a quarter point in February, May and August.
The Bank said in November that UK inflation has peaked, and that it should fall back to its 2% target in 2027.
Other economic data supports the case for a rate cut, economists say. The UK’s labor market is weakening, with latest UK unemployment data for the three months to October showing a rise in joblessness to 5.1%. Excluding unemployment figures for the pandemic, this is a 10-year high and would indicate that employers are circumspect about expanding their workforces.
And the UK economy contracted for a second month in a row in October, with GDP falling 0.1%.
“The labor market has entered a period of gridlock, with hiring stalling and more workers choosing to job hug rather than job hunt as switching roles becomes a high-risk strategy for workers already struggling with elevated living costs,” says Bestinvest personal finance analyst Alice Haine.
“For many, it may feel safer to stick with an existing job than face all the uncertainties that come with moving—from probation periods and pension resets to a greater chance of redundancy or the loss of flexibility afforded by an employer who understands their value.
“While a rate cut just before Christmas will certainly be welcomed, as we head into 2026, businesses will be assessing budgets carefully for the New Year.”
In addition, the tax-raising effects of the UK’s Autumn Budget in November have given business owners plenty of reason to be downbeat about the UK’s economic prospects in 2026. This, combined with falling inflation, will likely encourage the Bank of England to cut rates again in 2026, experts say. At the budget, the Office for Budget Responsibility cut its UK growth forecast to 1.4% for 2026, from 1.9% in March.
“We think today’s data release will see expectations for greater monetary easing in 2026 increase, aligning with our expectations for continued interest rate normalization in the new year,” Morningstar’s Slade says.
