Steady 3.8% Inflation Sparks 70% Odds of Bank Rate Cut Before Christmas

Financial markets have sharply increased bets on a pre-Christmas rate cut following the latest inflation figures showing UK prices holding steady. Inflation remained unchanged at 3.8% in September — lower than expected — prompting traders to predict that the Bank of England could lower the base rate from 4% to 3.75% before the year ends.

Before the latest data release, the probability of a rate cut stood at just 33%. However, following the steady inflation report, traders now see a 70% chance that the Monetary Policy Committee (MPC) will reduce the base rate at either its November or December meeting. The unchanged inflation figure came as a surprise, with analysts having forecast an increase to 4% due to energy and airfare costs. Instead, lower food and entertainment prices offset higher fuel costs, easing overall price pressure.

While some analysts believe the MPC could move as early as next month, others remain cautious. Deutsche Bank’s chief UK economist, Sanjay Raja, said inflation now sits “comfortably below the Bank’s expectations,” providing room to ease rates. However, experts from the EY ITEM Club argue that policymakers may prefer to wait for more data on wage growth — which has fallen slightly to 4.7% — before acting. With two more inflation reports due before December, markets are watching closely for signals of a policy shift.