Sterling plunged to its largest one-day decline in weeks on Wednesday as investors bet heavily that the Bank of England (BoE) will cut interest rates on Thursday. The move followed official data showing British inflation fell sharply in November, intensifying expectations of an imminent easing cycle.
UK Inflation Slows in November
Consumer price inflation (CPI) in the United Kingdom dropped to 3.2% year-on-year in November, down from 3.6% in October, marking the lowest level since March 2025. Economists surveyed by Reuters had forecast a smaller decline to 3.5%, making the data a surprise to markets.
Lale Akoner, Global Market Analyst at eToro, said:
“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.”
Sterling Reacts to Inflation Data
Following the inflation report:
- The pound fell 0.7% against the U.S. dollar, touching $1.3343, its weakest level in a week.
- Against the euro, sterling dropped as the euro strengthened 0.43% to 87.90 pence.
- Yields on UK government bonds fell sharply across maturities as investors priced in a likely rate cut.
Interest rate futures now show nearly a 100% probability of a 25 basis point cut by the BoE, up from 90% before the inflation figures.
Economic Context Supporting a Rate Cut
The case for a BoE rate cut is reinforced by multiple economic factors:
- Economic contraction: Britain’s GDP unexpectedly shrank in the three months to October, reflecting weaker momentum ahead of Finance Minister Rachel Reeves’ budget.
- Labor market softening: The unemployment rate hit its highest level since early 2021, while private sector pay growth slowed to its lowest in nearly five years.
- Budget measures easing inflation temporarily: BoE Deputy Governor Clare Lombardelli noted that government plans to shift climate change costs from energy bills to general taxation could reduce inflation by up to 0.5 percentage points from April 2026, potentially allowing the BoE to hit its CPI target sooner.
Monetary Policy Outlook
At the last Monetary Policy Committee (MPC) meeting, the BoE voted 5-4 to keep rates on hold. Economists now expect a narrow 5-4 vote in favor of a rate cut, with Governor Andrew Bailey most likely to switch his vote from last month’s decision.
Despite inflation in the UK remaining higher than in other major advanced economies, the combination of slower price growth, weaker economic momentum, and budgetary support measures has convinced markets that monetary easing is imminent.
Implications for the UK Economy and Markets
A BoE rate cut could:
- Boost consumer demand by reducing borrowing costs,
- Support business investment and economic growth,
- Pressure sterling to remain weak in the near term, benefiting UK exporters, and
- Reduce yields on government bonds, influencing global fixed-income markets.
Recent surveys by the Confederation of British Industry (CBI) suggest a temporary boost to growth from the budget, though deep-rooted challenges remain, including structural economic weaknesses and labor market concerns.
Conclusion
Falling inflation in November has cemented expectations of a BoE rate cut, prompting sterling’s sharp decline. Investors now price in a 25 basis point cut this week, highlighting growing confidence that the central bank will begin an easing cycle to support economic growth, while carefully monitoring the labor market and long-term inflation trends.
Leave a Reply