(qlmbusinessnews.com . Thurs 16th Jan, 2025) London, UK —
Surprise Fall in Inflation Raises Hopes for Interest Rate Cuts
Inflation in the UK unexpectedly dipped in December, sparking optimism for a potential interest rate cut in the coming weeks.
The annual inflation rate fell to 2.5%, down from 2.6% in November, marking the first decline in three months. The drop was attributed to easing hotel prices and smaller-than-usual increases in airfares. However, inflation remains above the Bank of England’s 2% target, with prices continuing to climb for essentials like fuel and second-hand vehicles.
The unexpected drop has alleviated pressure on Chancellor Rachel Reeves, whose Budget policies had faced criticism for contributing to recent financial turbulence. Government borrowing costs, which had surged to their highest levels in 16 years, eased following the news. Meanwhile, the pound rose slightly, reaching $1.22.
Economists now predict that the Bank of England, which held interest rates at 4.75% last month due to stagnant economic performance, may reduce rates to 4.5% in February. This shift could provide relief for households grappling with the rising cost of loans, mortgages, and credit cards.
Ruth Gregory, Deputy Chief UK Economist at Capital Economics, noted, “The data strengthens the case for an interest rate cut.”
Easing price rises for restaurants and falling hotel prices contributed to the decline in inflation, according to the Office for National Statistics (ONS). However, increases in fuel and tobacco prices partially offset these benefits.
The cost of living crisis remains a significant concern. Rent costs have surged by 9% year-on-year, while average broadband and mobile bills are expected to rise in April due to inflation-linked contracts.
Despite these challenges, Chancellor Reeves highlighted government efforts to protect incomes through policies such as increasing the minimum wage. Critics, however, argue that more action is needed to foster economic growth and support struggling businesses.
Investors and businesses are now calling for clarity on the government’s economic strategy. Jane Sydenham, investment director at Rathbones Investment Management, emphasised the need for specific plans, such as potential tax breaks for key industries.
The coming months will reveal whether this inflation dip signals a turning point for the UK economy or merely a temporary reprieve.
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