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UK CPI Rises 1.7% YoY in Sept, First Drop Below BoE Target in 3.5 Years, Nov Rate Cut Expectations Surge

Inflation in the UK has cooled significantly, with the September inflation rate reaching its lowest level in three and a half years, paving the way for the Bank of England to cut interest rates in November.

On October 16, data released by the UK Office for National Statistics showed that the CPI in September increased by 1.7% year-on-year, a significant decline from the previous 2.2%, lower than the 1.9% expected by economists and the 2.1% previously expected by the Bank of England.

This inflation rate has reached its lowest level since April 2021 and has fallen below the Bank of England's 2% target level for the first time. The reasons for the slowdown in inflation include a significant drop in air ticket and gasoline prices, as well as a noticeable slowdown in service industry inflation.

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The UK's service industry inflation rate in September was 4.9%, lower than the expected 5.2%. Financial journalist David Goodman said that the decline in the service industry inflation rate was surprising. According to his estimates, this is the largest decline since 2020, and if not considering the pandemic period, it is the largest decline since 2017.

With inflation cooling significantly, traders have increased their bets on the Bank of England cutting interest rates within the year, expecting the bank to cut rates by another 42 basis points by the end of the year, higher than the previous 35 basis points. Traders expect the Bank of England to cut interest rates by 24 basis points in November, higher than the previous 21 basis points.

Earlier this month, Bank of England Governor Bailey said in an interview that the Bank of England had previously worried about the sustained high pressure on living costs, but it seems that this is not the case now, which encourages him. If the news on inflation continues to improve, he will see more aggressive opportunities for interest rate cuts.

After the inflation data was announced, the pound took a short dive. The pound fell below the 1.30 mark against the US dollar for the first time since August 20. The UK's 10-year government bond yield fell by 6 basis points to 4.10%, the lowest since October 4.

On August 21 this year, the Bank of England started this round of interest rate cuts, announcing a 25 basis point cut in interest rates to 5%, in line with market expectations. This was the first interest rate cut by the Bank of England since the beginning of 2020.

Over the past year, UK interest rates have been at a high level for sixteen years, leading to a mild recession in the economy last year. However, as inflation continues to cool, the Bank of England finally chose to follow the footsteps of the European Central Bank in August and started the long-awaited path of interest rate cuts.

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