Cost of living falls
Fall in inflation fuels interest rate speculation
The Bank of England meets this month (pic: Terry Murden)
UK inflation sank to 1.3% last month, its lowest rate for more than three years, which is likely to fuel expectations that the Bank of England will cut interest rates.
Consumer prices rose at an annual rate of 1.3% compared with 1.5% in November, marking the smallest increase since November 2016, the Office for National Statistics said.
Market odds of a quarter point rate reduction on 30 January have risen to 62%, according to Bloomberg data on swaps trading.
Just last week the chances of a cut in the UK’s main interest rate to 0.5% were less than 5%.
Ayush Ansal, Chief Investment Officer at Crimson Black Capital, said: “Coming after a triple whammy of weak retail sales and slowdowns in both the manufacturing and service sectors, this surprise fall in inflation will arguably put the doves in the driving seat at the Bank of England.
“When the Bank’s Monetary Policy Committee meets later this month, the possibility of an interest rate cut will now be firmly on the table.
“Dovish comments from several MPC members earlier this month had already prompted many market watchers to price in a rate cut, and the absence of inflationary pressure could give the Bank’s rate-setters a free hand to cut.
“With the UK economy stuttering, the Bank may conclude that it’s better to get ahead of the curve on rates rather than risk playing catch up.
“With the door to a rate cut now ajar, the Pound is suffering and coming under sustained pressure. “
Markets were nervously awaiting the signing of the initial US/China trade deal with slight weakness in Asian markets and very little movement on the UK market.
Russ Mould, investment director at AJ Bell, said:” “Investors are slightly concerned about Treasury Secretary Steve Mnuchin saying the US would retain tariffs on Chinese goods until the second phase of the trade agreement was completed. The timing of phase two is a big unknown given how long the first phase took to sort out.
“Understandably this nervousness weighed on shares in commodity producers and saw investors turn to pharmaceutical stocks in the hope they will be more reliable in the current market environment.”