Expectations of an interest rate drop next month increased when UK inflation unexpectedly declined in December.
Inflation fell for the first time in three months, with prices rising 2.5% in the year to December compared to 2.6% the previous month.
The decrease was caused by lower-than-normal increases in ticket and hotel rates, although prices are still rising more quickly than the Bank of England’s aim.
The most recent data, however, relieve pressure on Chancellor Rachel Reeves, who has come under fire after the pound declined and government borrowing prices reached their highest point in a number of years.
Michael Saunders, a former member of the Bank of England’s monetary policy committee that sets interest rates, told Newsline that “if it stays like this, we will be on route to slightly more interest rate cuts.”
The UK economy did not grow at all between October and December, according to officials, therefore the Bank of England chose last month to keep interest rates at 4.75%.
The inflation data, however, “strengthens the case” for a drop to 4.5% next month, according to Ruth Gregory, deputy chief UK economist at Capital Economics. Additionally, investors have placed larger wagers on the possibility of a cut.
Inflation has significantly decreased from its peak in October 2022, when prices skyrocketed, raising household living expenses and causing interest rates to rise, which in turn increased the cost of credit cards, loans, and mortgages.
Last month, economists predicted that inflation would not change.
According to the Office for National Statistics (ONS), easing restaurant price increases and declining hotel rates contributed to a decline in inflation.
Tobacco items, such as cigars, cigarettes, pouches, and vape refills, also saw slower price increases.
However, the growing cost of petrol and used automobiles counteract this, according to ONS chief economist Grant Fitzner.
Following the release of the statistics, borrowing costs returned to their levels from the previous week, and the value of the pound increased little to $1.22.
Although the government had “taken action to protect working people’s payslips from higher taxes” and raised the minimum wage, Chancellor Reeves acknowledged that there was “still work to be done to help families across the country with the cost of living.”
However, Mel Stride, the shadow chancellor, declared that this administration had “killed stone dead” economic development and demanded that Reeves “urgently explain how she will now achieve this.”
It is believed that Reeves will make statements regarding Labour’s industrial strategy in response to market volatility.
Rathbones Investment Management’s investment director, Jane Sydenham, told the BBC’s Today show that investors needed to “see some detail” on the UK’s intentions.
Will particular industries be eligible for tax breaks? The market wants to see action and specifics, in my opinion,” she stated.
Because the government will have to pay more interest to finance its current debt, rising borrowing rates have an impact on its tax and spending plans. This reduces the amount available for investments and public services.
Public services would “have to live within their means,” Treasury Chief Secretary Darren Jones told Newsline.
He responded, “It’s just about prioritization,” when asked if it sounded like cuts were imminent.
According to Jonny Getting, director of operations at Southampton’s Ennio’s, an Italian restaurant and small hotel, the business’s prospects seem “considerably worse” given the April cutbacks in business rates relief and the hikes in national insurance contributions and the minimum wage.
The “last scenario” would be to reduce staff working hours, Mr. Gettings continued, although the restaurant might consider reducing the quantity of its menu, reviewing its suppliers, or altering its operating hours.
“As soon as you increase the prices, you’ve got another bunch of problems to deal with, because then the worry is the customers will vote with their feet and they’ll go and eat elsewhere,” he stated.
“You can only charge so much for a menu item before the guest is going to say, ‘well, hang on a minute’.”
Rising rent and expenses
According to the most recent data, some people’s phone and broadband bills will increase in April because their contracts are linked to inflation.
Website for comparison According to Uswitch, these prices are expected to rise by an average of £15.90 year for mobiles and £21.99 annually for internet.
However, many contracts now reflect any anticipated increases in pounds and pence annually throughout the duration of the agreement due to new regulations.
As UK house prices grew 3.3% in the 12 months to November, with Northern Ireland seeing the largest gain, separate ONS data released on Wednesday indicated that average rent expenses increased 9% in December compared to the same month last year.
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