Markets Now See 70% Chance of a Christmas Rate Cut as Inflation Holds at 3.8%

After months of stubborn price pressures, steady inflation has given markets new hope of a rate cut before Christmas. The UK’s consumer price index (CPI) remained unchanged at 3.8% in September, well below forecasts, prompting traders to bet on the Bank of England reducing the base rate from 4% to 3.75% in the coming months. With economic growth slowing and wage inflation softening, analysts suggest that the Monetary Policy Committee (MPC) could act as early as its December meeting.

Before the latest inflation data was released, markets saw only a 33% chance of a rate cut this year. Now, that probability has more than doubled to 70%. The unchanged CPI surprised forecasters, who had expected a rise to 4% due to energy and airfare costs. Instead, lower food prices and a drop in entertainment costs offset higher petrol prices, helping inflation stay below projections. Economists say this consistent moderation indicates that the Bank’s monetary tightening is finally taking effect, creating space for a modest rate reduction.

While the markets are increasingly confident of a cut, economists remain split on when it might happen. Deutsche Bank’s UK chief economist Sanjay Raja believes the MPC could cut rates as early as next month, citing inflation’s “healthy” distance from the Bank’s forecasts. However, others, including analysts at the EY ITEM Club, caution that policymakers may want more evidence that wage growth, now at 4.7%, continues to cool before easing policy. They suggest the MPC might prefer to wait until February 2026 for a clearer picture of wage trends and fiscal impacts from Chancellor Rachel Reeves’ upcoming November Budget.