UK inflation eases; markets eye potential BoE rate cut

Pound drops, stocks rise in response to lower-than-expected inflation figures

By Raed Alkhedr | @raedalkhedr | 20 December 2023

Market close
  • UK's inflation slows down unexpectedly to 3.9%.

  • Pound falls, bond yields and stocks rise post-inflation data.

  • Oil prices rally amid Middle East tensions and Red Sea trade concerns.

In the Uk, inflation significantly slowed down in November, catching markets by surprise. The consumer prices index showed a year-on-year increase of 3.9%, below the expected 4.4% rise and the previous month's 4.6%. This slowdown has shifted market expectations towards a potential interest rate cut by the bank of england in 2024.

Market reaction to inflation data

following the inflation data release, the british pound experienced a decline, while bond yields and stock prices moved in the opposite direction. The FTSE100 index notably reached its highest level since May, closing 1% higher. The inflation data, indicating a stabilization at the slowest pace since September, has impacted various market segments.

The yield on two-year government bonds, closely linked to the anticipated interest rate path, dropped by 0.17% to 4.12%, marking its lowest point since late May. Similarly, the yield on standard 10-year treasury bonds decreased by 0.12 percentage points to 3.53%.

Bank of England's rate cut expectations

Markets are now pricing in the likelihood of an interest rate cut by the bank of england in the first half of 2023, as inflation gradually approaches the central bank's target level of around 2%. It's important to note that the bank of england was among the first to raise interest rates in response to surging inflation.

Oil prices on the rise amid geopolitical tensions

Oil prices continued their upward trajectory, with brent crude futures increasing by 0.3% to $79.50 per barrel and west texas intermediate rising by 0.4% to $74.24 per barrel. The increase is largely attributed to concerns over global trade disruptions and geopolitical tensions in the Middle East, especially following Houthi attacks in the Red Sea. A task force formed by Washington to protect trade in the region highlights the growing concerns over potential disruptions in global trade and oil supplies. Despite these tensions, the actual impact on oil supply remains limited for now.