Weak U.K. Inflation Reinforces Bank of England Rate Cut Prospects, Says MUFG

07:18 AM EST, 12/17/2025 (MT Newswires) -- If there was any doubt about a rate cut at the Bank of England's Monetary Policy Committee (MPC) meeting this week, then those doubts are surely gone now after Wednesday's consumer price index figures for November revealed a much weaker-than-expected set of data, said MUFG.

The main United Kingdom CPI readings were all weaker than expected, with the annual rate falling 0.4 percentage point to 3.2%, which was 0.3 percentage point weaker than the consensus, wrote the bank in a note to clients. It was the largest decline in the annual rate since September last year.

Food & non-alcoholic beverage prices saw a notable slowing, with the annual increase declining from 5.2% to 4.2% which will be a relief to some MPC members who were concerned over the impact of higher food prices on inflation expectations and the potential for feeding into higher wage pressures, stated MUFG.

Overall services inflation fell, but by just 0.1 percentage point to 4.4%. Housing services and actual rents slowed, but this was offset by a pick-up in travel and transport. So, overall the concerns over 'sticky' underlying inflation pressures will persist within the MPC, pointed out the bank.

Indeed, MUFG's estimate of the BoE's underlying services measure -- excluding certain volatile components -- actually picked up from 4.0% to 4.1%.

However, this will be viewed as a good report and will reduce overall inflation concerns, especially with the jobs data showing a continued deterioration in labor demand, added the bank.

Before the jobs and inflation data this week, a 5-4 vote favoring a cut with Governor Andrew Bailey joining the voters for a rate reduction on Thursday was a plausible outcome. Chief Economist Huw Pill could well now also vote for a cut, possibly along with Clare Lombardelli, meaning up to a 7-2 vote favoring a reduction is possible, noted MUFG.

Megan Greene and Catherine Mann could well continue to resist, given the evidence of still 'sticky' underlying services inflation.

But ultimately, the BoE has more cutting still to do than most other G10 central banks. The inflation forecasts in February will be lower and another cut then seems likely, according to the bank.

That isn't priced at the moment and, as such, MUFG sees scope for front-end yields to move lower, which will put sterling (GBP) under increased downward pressure. EUR/GBP moving higher over the coming months is the likely outcome.

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