U.K.'s In Line Inflation Is Another Obstacle Removed for A Bank of England December Rate Cut, Says Mitsubishi UFG

06:42 AM EST, 11/19/2025 (MT Newswires) -- The October inflation data released earlier Wednesday in the United Kingdom is largely in line with market consensus -- that means no nasty surprises that could have raised doubts over the ability of the Bank of England to cut the key policy rate in December, said MUFG.

There were five key events between the November and December BoE Monetary Policy Committee (MPC) meetings that would be key to determining the decision in December, wrote the bank in a note. Two consumer price indexes and employment reports and the budget, next Wednesday. Investors have had two of the four reports with wage growth also decelerating, consistent with scope to cut in December.

The headline CPI year-over-year rate slowed from 3.8% to 3.6% in October, slightly higher than the 3.5% expected. The core rate was in line at 4.5% versus 4.6% previously, while the services year-over-year inflation rate fell 0.2ppt to 4.5%, weaker than the 4.6% expected.

The largest contribution to the slowdown in inflation in October came from housing and household services, which include utility bills for natural gas and electricity. The annual inflation rate for gas fell from 13.0% last month to 2.1% in Wednesday's data, reflecting the base effect with the month-over-month increase in October of 0.9% compared with 11.7% in October 2024. There was a similar favorable base-effect for electricity prices. Rents also continue to slow, with actual rents showing a drop in the year-over-year rate from 4.3% to 4.1%. The rate stood at 5.8% in June.

The BoE's measure for underlying services -- excluding volatile components, rents and travel -- increased slightly based on MUFG's calculations from 3.9% to 4.0%. However, given the broader data was clear in showing further disinflation, the bank doubts this slight tick higher would have much impact on an MPC decision to likely cut in December.

There is still another jobs report and CPI report and in that regard, no strong conclusions on a definite rate cut in December can be made, added MUFG. Still, the OIS market implies an 80% probability of a 25bps rate cut in December, which also reflects an expectation of a budget next week that contains tax hikes and measures to reduce household inflation pressures further.

Wednesday's data leaves the bank "comfortable" with its view of a December rate cut and this report provides important reassurance of the BoE projection that the inflation rate likely peaked in September at 3.8%, 0.2ppt lower than expected.

Front-end yields in the U.K. can fall further, but not be much ahead of the budget and two more key data releases in December. That will limit sterling (GBP) reaction ahead of the budget next Wednesday, according to MUFG.

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