The fall in the Consumer Prices Index (CPI) from 2.6% to 2.5% in the 12 months to December 2024 has “put a February rate cut firmly in the frame” according to Sarah Coles, personal finance expert at DIY investment platform Hargreaves Lansdown.
It also takes the pressure off Rachel Reeves, who is being criticised for her handling of the economy leading to higher borrowing costs.
On a monthly basis, CPI rose by 0.3% in December 2024, down from 0.4% in December 2023. Another inflation measure, the CPIH – which includes owner-occupier housing costs – rose by 3.5% in the 12 months to December 2024, unchanged from November.
Increasing transport costs continued to drive inflation up, but the largest contribution to prices coming down came from restaurants and hotels.
The fall in inflation was greater than forecast, with hotel prices, which rose a year ago, dipping this month. The cost of tobacco was another downward driver, according to Grant Fitzner, chief economist for the Office for National Statistics (ONS).
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Base rate cut may come as early as February
Experts said the fall makes a February cut in the Bank of England base rate this month more likely. The next Monetary Policy Committee (MPC) announcement is due in early February.
Lale Akoner, global market analyst at investment platform eToro, said: “We continue to expect that a rate cut in February is still odds-on.
“Most importantly for the BoE, core CPI fell and services inflation cooled down to lowest since March 2022.
“This will be a relief for the markets where there has been an unprecedented sell-off in the bond markets, leading to higher interest rates, and subsequent tightening in financial conditions.”
However, Peter Stimson, head of product at MPowered Mortgages, said that the next cut may come later.
“Even with today’s progress on CPI, the bank is walking a tightrope between the need to leave interest rates high to tame inflation and the desire to cut them to kick-start the flatlining economy.
“CPI is still well above the Bank of England’s 2% target, and provided tomorrow’s GDP figures aren’t horrendous, no one should expect the bank to bring forward its next base rate cut to February,” he added.
Most experts are expecting two rate cuts in 2025, with one to come at the end of the year.
