Investors and borrowers cheer shock inflation drop to 3.9% – as it fuels rate cut hopes

The so-called Santa rally was handed a boost on Tuesday after fresh data showed a shock slump in consumer price inflation last month.

CPI fell to 3.9 per cent in November, down from 4.6 per cent in October and lower than economist forecasts of 4.4 per cent, according to the Office for National Statistics.

The FTSE 100 jumped 1.3 per cent at the open as two, five and 10-year Government bond yields sank by more than 10 basis points each, reflecting freshly heightened expectations of looming interest rate cuts.

Sterling fell 0.5 per cent against the US dollar to $1.27 and 0.4 per cent against the euro to €1.15.

Christmas Cheer: Andrew Bailey and MPC member Stephanie Flanders 

Thomas Pugh, economist at RSM UK said the ‘sharp decline’ was ‘significantly larger than expected’ and ‘suggests the first interest rates cuts may be closer than we had thought’.

The CPI slump blindsided both economists and the Bank of England, which has been pushing back against expectations of impending base rate cuts.

The BoE’s Monetary Policy Committee will be particularly encouraged by a fall of 5.7 per cent to 5.1 per cent in core CPI, which excludes energy, food, alcohol and tobacco.

Core services inflation, which has been among the stickiest of inflation measures, also fell from 6.6 to 6.3 per cent.

Pugh said the bigger-than-expected fall in CPI should also ‘help to anchor inflation expectations [and] slow nominal wage growth, reducing one of the key risks for the MPC’.

‘An excellent early Christmas present for the MPC and consumers alike,’ he added.

CPI fell by far more than expected in November, according to the Office for National Statistics

Mortgage rates could fall 

Managing director for equity research at RBC Capital Markets Anthony Codling said the inflation reading is ‘good news for the UK housing market’, with mortgage rates likely to ‘follow suit’.

He added: ‘We expect that today’s news will re-ignite the debate about when bank rate will start to fall.

‘Falling mortgage rates mean more people will be able to buy a home and activity in the housing market is likely to rise which is likely to underpin house prices, reducing the risk of house price falls in the new year.’

Analysts at ING said: ‘Despite today’s positive surprise, we think services inflation could stay sticky in the 6 per cent region into early next year.

‘At face value, that would justify the BoE’s more cautious approach at last week’s meeting. The BoE took a decidedly different line to the Federal Reserve, offering implicit pushback against the quantity of rate cuts priced into financial markets in 2024.

‘[But] we think markets are right to be pricing a number of rate cuts for 2024. Investors now expect 140bps of cuts in 2024 after this latest downside surprise on inflation, starting in May.

‘That’s maybe pushing it, and we still think the Bank will prefer to tread a little more cautiously with 100bp of cuts starting in August.’

This post first appeared on Dailymail.co.uk