Inflation Surprise Adds More Rate Cuts Expectations: Experts comment

George Lagarias, Chief Economist at Forvis Mazars:

 
Today’s inflation number was a very welcome surprise. It probably all but solidifies tomorrow’s rate cut from the Bank of England, and it could add one more cut in the discussion before next June. We have maintained for some time that slowing growth is not a fertile ground for inflation, and the numbers begin to move the way we were expecting. Having said that, we are mindful of the fact that services inflation remains high, even as activity is slowing and unemployment rising.
 

Soft CPI meets soft jobs data: the BoE gets its green light

This morning’s CPI release showed that headline inflation continued to ease, confirming that the UK’s disinflation trend has re-established itself after stalling earlier in the year. Core inflation also moved lower, helped by softer goods prices and a moderation in services inflation, although services remain uncomfortably high relative to the Bank of England’s 2% target. The data reinforce the view that inflation pressures are gradually unwinding, but not yet at a pace that would allow the BoE to declare victory. Importantly, inflation is still well above target, meaning any policy easing will need to be justified by a consistent trend rather than one-off improvements.

Yesterday’s labour market figures painted a similar picture of an economy that is weakening at the margins. Wage growth has slowed from its peak, job vacancies continue to decline, and the unemployment rate has drifted higher, all signs that labour-market tightness is easing. This softening is precisely what the BoE wants to see: weaker labour demand reduces the risk of wage-driven persistence in services inflation. Taken together with today’s CPI print, the two datasets support the narrative that underlying inflationary pressure is cooling, even if headline numbers have not yet fully converged toward target.

For the BoE, the combination of easing inflation and a softening labour market strengthens the case for a rate cut, aligning with market expectations of a move at this week’s meeting. However, because inflation remains above target and services components still look sticky, policymakers are unlikely to deliver a deeply dovish message. Instead, the BoE is likely to frame any cut as part of a gradual, risk-managed shift rather than a full easing cycle. Markets will interpret today’s CPI data as giving the BoE the “green light,” but the bank’s communication will determine whether sterling maintains its resilience or softens on the back of the rate differential story.

GBP/USD daily chart

Lale Akoner, Global Market Analyst, eToro says: “UK inflation cooled to 3.2% in November, coming in below expectations and strengthening the case for a Bank of England rate cut this week. For retail investors, the key takeaway is that the UK economy is losing momentum as unemployment is rising, wage growth is slowing, and activity has contracted for two straight months. A rate cut would signal the start of an easing cycle aimed at supporting demand, and markets have moved quickly to price that in, with the pound weaker and gilt yields heading lower.

For investors, lower rates typically mean cheaper borrowing costs and improved conditions for rate-sensitive sectors such as real estate, utilities, and consumer discretionary. At the same time, falling yields can support equity valuations more broadly. However, softer growth indicators suggest a selective approach is warranted. Retail investors may want to balance opportunities from policy easing with the risks of a cooling economic backdrop.”

UK inflation paves way for a rate cut

“The BoE was very likely to cut tomorrow anyway, but today’s inflation data signals that no obstacles remain to the move. UK inflation remains firmly above target, and higher than peers on the continent, but the gap is closing, which provides some relief both for consumers and for an embattled government. Discounting at retailers helped drive the fall, so if this is repeated in subsequent readings the worries about a weakening economy will only grow louder, but today the story is all about tomorrow’s rate cut.”