UK inflation dropped unexpectedly to 3.2% in November, the lowest level since March, paving the way for a possible interest rate cut by the Bank of England. Food, alcohol, and tobacco prices drove the decrease in the Consumer Prices Index. Markets reacted positively, with the FTSE 100 rising over 1%. Core inflation also fell to 3.2% in November, below forecasts.

The fall in inflation was driven by slowing food, beverage, and tobacco prices, according to the UK Office for National Statistics. Morningstar economist Grant Slade noted that the UK’s disinflationary trend is ongoing, with CPI inflation at 3.2% in the 12 months to November. This unexpected drop in inflation could lead to a 25 basis point rate cut by the Bank of England.

The Bank of England is expected to announce a 0.25 percentage point cut in interest rates, lowering them to 3.75% from 4%. Other economic indicators, such as weakening labor market data and a 0.1% contraction in GDP for October, support the case for a rate cut. The Bank of England previously cut rates in February, May, and August.

The UK’s labor market is stalling, with unemployment rising to 5.1% in the three months to October, a 10-year high excluding pandemic-related data. Businesses are cautious about expanding due to economic uncertainties, leading to a gridlock in hiring. Falling inflation, combined with tax implications from the Autumn Budget, may prompt the Bank of England to cut rates again in 2026.

Experts believe that today’s data release will lead to expectations for increased monetary easing in 2026. The Office for Budget Responsibility revised the UK’s growth forecast to 1.4% for 2026, down from 1.9% in March. Morningstar’s Slade anticipates continued interest rate normalization in the new year, aligning with expectations for further rate cuts by the Bank of England.

Read more at Morningstar: UK Inflation Falls Ahead of Interest Rates Decision