Interest cut predicted as inflation is lowest for three years

UK INFLATION has slipped to a three-year low, raising expectations that interest rates could be cut.

Figures from the Office for National Statistics (ONS) show the Consumer Price Index (CPI) was 1.3 per cent last month, down from 1.5 per cent in November.

Speculation increased across the City about the potential for a rate cut by the Bank of England, after the ONS said early high street sales and discounted hotel rooms pushed inflation to its lowest since November 2016.

The figure was below analyst forecasts of 1.5 per cent and appears to have stirred demand for a rate cut.

It followed recent hints from departing Bank of England governor Mark Carney that a cut could stimulate the economy.

The pound was lower against most major currencies immediately after the inflation figure was announced.

Members of the central bank’s Monetary Policy Committee (MPC), such as Michael Saunders and Gertjan Vlieghe, have recently suggested there is some support for a cut.

City analysts said the surprise fall in inflation means MPC members are likely to vote for a cut at their next meeting, with market odds now at 60 per cent in favour of a cut.

“Lower inflation puts rate cut back on the menu,” said Yael Selfin, chief economist at KPMG UK.

“For the Bank of England, a cut to the policy rate may seem like a free lunch, with inflation well below target in the latest figures and the mandate safe from jeopardy.

“However, lower rates represent a significant burden to the banking and insurance industries, as well as to pensions.”

Falling clothes prices were the second-largest drag on inflation as retailers heavily discounted women’s fashion ahead of Christmas.