UK inflation surprise: Interest rate cut nailed on for Thursday as calls grow for more easing - FTSE 100 leaps

A sharper-than-expected fall in the annual rate of inflation paves the way for a series of interest rate cuts, starting this side of Christmas.

The Bank of England is almost certain to reduce the cost of borrowing at its last rate-setting meeting of 2025 on Thursday after official figures showed that the consumer prices index (CPI) measure of inflation had fallen to 3.2 per cent in November, from 3.6 per cent the month before. This marks the lowest CPI rate since March this year and compares with the 3.5 per cent that most economists were expecting for last month. Markets found support from the positive news and the FTSE 100 share index was up by about 1.5 per cent in morning trade on Wednesday.

While many prices are still rising across the country, the pace of those increases has cooled, while some items have actually fallen in price, contributing to the overall easing in inflation. Food and drinks, as well as alcohol and tobacco, were the biggest factors pulling on the overall rate of inflation last month.

While many food prices are still rising for consumers, those increases are cooling, while there have also been some deflationary pressures.

On a monthly basis, food and non-alcoholic drink prices fell by 0.2 per cent in November, with the biggest drops coming from bread and cereals, as well as declines in dairy, sugar, jam and chocolate.

The annual rate of inflation for the category fell to 4.2 per cent in November, from 4.9 per cent in October. Alcohol and tobacco inflation saw a sharp drop to 4 per cent in the year to November, from 5.9 per cent in the year to October - marking the lowest rate in nearly three years.

Members of the central bank’s nine-strong monetary policy committee (MPC) are now widely expected to vote in favour of a quarter-point cut in the bank base rate at this Thursday’s rate-setting meeting, which would take it down to 3.75 per cent and trigger lower payments for those on a tracker mortgage. Economists are expecting further cuts during 2026.

Kevin Brown, savings expert at Glasgow mutual Scottish Friendly, said signs that price pressures were finally easing would be taken as “welcome reassurance” by policymakers.

There have been storm clouds hanging over the Bank of England for some time now but interest rates are expected to be cut this week.

“Taken together with slowing wage growth and a weakening economy, a rate cut this week now looks nailed on. And we expect at least one, but possibly two further rate reductions over the coming 12 months.

“For borrowers, this is the most encouraging backdrop they’ve seen in a while. Falling inflation and lower interest rate expectations should continue to feed through into more competitive mortgage pricing, which will benefit those coming to the end of fixed-rate deals,” he added.

“As for savers, it means the best rates won’t be around for long - so now could be the time to act. And for those looking to improve their chances of outpacing inflation, investing remains the more effective option to provide the potential for greater returns over the long term.”

Isaac Stell, investment manager at Wealth Club, noted: “Despite inflation falling, there is still some way to go before the headline rates fall back to the [Bank of England’s] 2 per cent target. However, today’s news is a bright spot for the Bank of England, government and consumers alike.

“With challenging economic conditions in the form of declining GDP and an unemployment rate nearing a five- year high, it is hoped a perfectly wrapped rate cut [this Thursday] will deliver some festive cheer to the UK economy.”

Trade union leaders called for a sequence of rate cuts in the coming months to ease the pressure on households and businesses.

TUC general secretary Paul Nowak said: “The economy is fragile and high interest rates are draining confidence from households and firms. It’s vital that we now boost demand.

“The Bank of England has been too cautious this year, and inflation is already lower than they expected only last month. So an interest rate cut this week must be the start of a sequence of reductions over the months ahead. It’s long overdue and it’s the shot in the arm that the economy needs.

“Lower rates will give firms the confidence to invest and help get more households spending.”

Releasing the latest inflation data, the Office for National Statistics also pointed to more Black Friday discounting on clothes and shoes this year, which helped bring down prices by 0.3 per cent between October and November. The biggest falls came from women’s clothing across a range of items, including trousers and skirts.

ONS chief economist Grant Fitzner said: “Inflation fell notably in November to its lowest annual rate since March.

“Lower food prices, which traditionally rise at this time of the year, were the main driver of the fall, with decreases seen, particularly for cakes, biscuits and breakfast cereals. Tobacco prices also helped pull the rate down, with prices easing slightly this month after a large rise a year ago. The fall in the price of women's clothing was another downward driver.

“The increase in the cost of goods leaving factories slowed, driven by lower food inflation, while the annual cost of raw materials for businesses continued to rise,” he added.

Make sure you keep up to date with breaking news from across Scotland by signing up to our free newsletter here.

Homeowners looking to remortgage in the coming months stand to benefit from the improving inflation backdrop. Lenders have been battling for business of late and rates on two-year fixed-rate deals are inching ever-closer to 3.5 per cent.

Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, said: “If you’re set for an imminent remortgage, and you’re coming off a two-year deal, you may well see your rate fall, putting valuable cash back in your pocket.

“If you’re moving from a five-year deal, you have escaped the worst of the mortgage pain for the past five years, and although you will see repayments rise, it might not be anywhere near as bad as you feared.”

Scotland’s private sector report card - mixed scoring as business confidence rebounds