Yesterday’s unexpected announcement revealed that the UK inflation rate dropped to 1.7% in September, marking its lowest level in over three years and falling below the Bank of England’s 2% target.

With the UK base rate currently at 5%, this news has raised hopes of a potential rate cut in November. Many economists are forecasting a 0.25% reduction, and the likelihood of an additional 25bps cut before Christmas has also increased. However, further cuts will depend on inflation remaining low and the economy continuing to stabilise.

The Bank of England has previously been cautious about cutting rates too quickly, but this announcement, combined with the recent news of UK economic growth resuming in August, could make the decision clearer. Since the summer, we’ve observed declines in both the 1Y GBP SONIA rate and the 1Y UK CPI Inflation swap rates, as shown in the graph below, supporting the case for a UK rates cut in the near future.

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