The Bank of England may cut interest rates within weeks after official figures showed that inflation has fallen to its lowest level in three years.
The consumer prices index fell to 1.3 per cent in December, the slowest annual rate of price growth since November 2016, the Office for National Statistics said. Economists had been expecting no change from the previous month’s reading of 1.5 per cent.
Markets are pricing in a 64 per cent chance that the Bank of England will cut rates from 0.75 per cent at its monetary policy committee meeting on January 30. A week ago the odds stood at only 5 per cent.
Michael Saunders, one of two members who voted for a cut at the committee’s last meeting, gave warning yesterday that the economy remained vulnerable to political uncertainty and low growth. He said that an interest rate cut should be made quickly to reduce the risk “that the economy ends up in the difficult situation of a self-perpetuating low inflation trap”.
The Bank of England expects inflation to fall further and is forecasting that it will be about 1.25 per cent by the spring on the back of lower energy and water prices. Inflation is likely to remain below target for much of the next two years before domestic inflationary pressures lift it to 2 per cent by the final quarter of 2021.
Price growth last month was held back by heavy discounting on the high street, with clothing and footwear prices falling by 0.8 per cent in the year to December. Restaurant and hotel prices rose over the same period by 1.6 per cent, but this compared with a larger increase of 3.1 per cent in the year to December 2018. .
Core inflation, which excludes energy, fuel, alcohol and tobacco, sank to 1.4 per cent, down from 1.7 per cent in November.
Ruth Gregory, of Capital Economics, the consultancy, said: “The figures might be enough to tip the balance on the MPC towards an imminent rate cut. If the data fails to improve, interest rates could be lowered as soon as January 30.
“But if the figures continue to show signs of a turnaround, most MPC members may be content to sit on their hands. It will be a very close call.”