Sterling tumbles as declining inflation cements BoE cut bets

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British inflation falls to 3.2%, lowest since March

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Interest rate futures show near certainty of BoE rate cut

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BoE's Bailey likely to switch vote for rate cut

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Sterling drops 0.7% against dollar

By Joice Alves

LONDON, Dec 17 (Reuters) - Sterling was set for its biggest one-day drop in weeks on Wednesday as investors added to bets that the Bank of England will cut rates on Thursday after data showed British inflation unexpectedly fell sharply in November.

British consumer price inflation fell to 3.2% in November, its lowest since March, from 3.6% in October, official figures showed on Wednesday.

The median forecast in a poll of economists surveyed by Reuters had been a decline to 3.5%.

DATA STRENGTHENS CASE FOR RATE CUT

Interest rate futures are now pricing in a close to 100% chance of a 25 basis point cut by the BoE, compared with a 90% chance before the inflation figures.

The pound fell 0.7% against the dollar to as low as $1.3343, its weakest level in a week, and was set for its biggest one-day drop since early November. Against the euro, it also fell, with the euro up 0.43% to 87.90 pence.

The inflation decline strengthened the case for a BoE rate cut this week, said Lale Akoner, Global Market Analyst, eToro.

"A rate cut would signal the start of an easing cycle aimed at supporting demand, and markets have moved quickly to price that in, with the pound weaker and gilt yields heading lower," she said. Yields on British government bonds fell sharply across maturities. Also supporting the case for a rate cut, Britain's economy shrank unexpectedly in the three months to October, losing momentum in the fraught run-up to finance minister Rachel Reeves' budget, according to data on Friday.

ANOTHER 5-4 BOE VOTE SPLIT EXPECTED

Last month the BoE's Monetary Policy Committee voted 5-4 to keep interest rates on hold. Economists expect a December rate cut by only a narrow 5-4 margin.

Of those members who opposed a cut last month, Governor Andrew Bailey looks most likely to switch votes.

British inflation has been higher than in other major advanced economies, and in November the central bank forecast it would remain above its 2% target until the second quarter of 2027.

But since then some economic figures have suggested that Reeves' budget could help support growth. Last week, the Confederation of British Industry on Friday bumped up its economic growth forecast for next year, citing a temporary boost to government spending following the budget, while warning that deep-rooted problems remained. British businesses have reported some renewed momentum after months of worry about possible tax increases, PMI figures showed on Tuesday.

BoE Deputy Governor Clare Lombardelli said plans announced in the budget to shift climate change costs away from levies on energy bills towards general taxation might temporarily lower inflation by up to half a percentage point from April 2026 - potentially allowing the BoE to hit its CPI target sooner - but do little to change the longer-term outlook. On Tuesday, data showed Britain's unemployment rate hit its highest since the start of 2021 and private sector pay growth was the weakest in nearly five years in the run-up to Reeves' annual budget. (Reporting by Joice Alves and Samuel Indyk in London; ediitng by Stefano Rebaudo and Alex Richardson)