Inflation in the United Kingdom (UK) grew more than expected during the month of October, reaching over the Bank of England’s target and potentially stalling further interest rate cuts. 

The annual consumer price inflation reached 2.3% in October compared to 1.7% in September, which was the lowest reading recorded since April 2021. The monthly rate jumped 0.6%, an increase from the flat reading during the previous month. 

The core consumer price inflation that excludes volatile energy and food prices increased 0.4% on monthly basis, meaning the annual rate grew to 3.3% from 3.2% last month. 

Although the annual inflation rate remains well below the 11% peak it reached two years ago following the Ukraine war, its sharp rise above the Bank of England’s 2% medium-term target poses challenges for the central bank, especially amid significant public spending hikes outlined in the budget.

Sanjay Raja, Chief UK Economist at Deutsche Bank, said, “Today’s CPI print marks a shift away from previously encouraging data.”

“Today’s data won’t be as encouraging for the Bank of England, who have talked up a gradual approach in dialling down restrictive policy. In fact, today’s data will likely reinforce this message – allowing the MPC to take a more gradual and cautious path in cutting interest rates.”

Deutsche Bank Research predicts that inflation in 2025 will surpass this year’s levels but is expected to return to the Bank of England’s 2% target within two years.

Following the October 30 budget, which raised employer taxes and risks increasing prices and wages, the Bank of England revised its inflation forecasts upward for the next three years.

Before the budget and the election of Donald Trump as the next U.S. president, markets anticipated around four interest rate cuts by the UK central bank by the end of 2025. However, these projections have been scaled back to two or three.

The Bank of England’s Monetary Policy Committee, responsible for setting the base interest rate, will meet in December, and the latest inflation figures may dampen expectations for a rate cut at that meeting.

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