LONDON (AP) — Inflation in the UK has dropped to its lowest level in over three years, according to official data released on Wednesday. This decline has strengthened market expectations that the Bank of England will cut interest rates at its upcoming policy meeting in November.


The Office for National Statistics reported that consumer prices increased by 1.7% in September, down from 2.2% in August. The decline was mainly due to lower airfares and petrol prices. However, inflationary pressures were subdued across various sectors, including services, which is a concern for policymakers as it represents about 80% of the British economy.

The decline in UK inflation was sharper than the 1.9% analysts had predicted, marking the first time since 2021 that inflation has fallen below the Bank of England's target rate of 2%.

As a result, the central bank's rate-setting committee is now expected to lower its main interest rate again in early November, from 5% to 4.75%. This would follow a previous rate cut in August, the first reduction since the early stages of the COVID-19 pandemic in early 2020.

"A quarter-point rate cut in November is now effectively a done deal, and this report certainly makes the path to a consecutive cut in December much clearer," said Luke Bartholomew, deputy chief economist at abrdn, formerly known as Aberdeen Asset Management.

Central banks worldwide had raised borrowing costs from near-zero levels during the pandemic, as inflation surged initially due to supply chain disruptions and later from the effects of Russia’s full-scale invasion of Ukraine, which drove up energy prices.


Higher interest rates have been instrumental in reducing inflation from multi-year highs by making borrowing more expensive for businesses and consumers. As inflation eases, central banks have started to lower rates. Last month, the U.S. Federal Reserve cut its main interest rate, while the European Central Bank, which oversees monetary policy for the 20 eurozone countries, is expected to do the same on Thursday.


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The Bank of England is also anticipated to reduce borrowing costs again at its next meeting in November, especially as it will have a clearer picture of the government’s budget set to be released on Oct. 30.


The new Labour government has indicated a need to address a £22 billion ($29 billion) deficit in public finances and has suggested potential tax increases and spending cuts. Such fiscal measures could dampen the near-term economic outlook and exert further downward pressure on inflation.

The lower inflation rate in September provides a boost for Treasury Chief Rachel Reeves as she prepares to deliver her first budget. Since many government benefits are tied to September's inflation rate, the reduced rate will help ease fiscal pressure. Additionally, the prospect of lower borrowing costs in the coming months could reduce the government's interest payments on debt, potentially giving Reeves more flexibility in her budget planning.


However, the timing is less favorable for many vulnerable households in the UK. Benefits are calculated based on the inflation rate in September, and if they were instead tied to October's rate—when inflation is expected to rise due to higher domestic energy bills—recipients would have seen a larger increase in their benefits.


“This temporary fall is badly timed for millions of low-to-middle income families as it will result in a lower increase in their benefits next year,” said Lalitha Try, economist at the Resolution Foundation.