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Rate cuts expected as inflation hits lowest level since 2016

Sterling fell on 15 January after official statistics revealed a steep and surprise fall in inflation for the month of December, all but sealing the deal for a now-likely Bank of England (BoE) interest rate cut later this month.

Inflation fell from 1.5% to 1.3% in December, the Office for National Statistics (ONS) said, when markets were looking for it to remain unchanged at 1.5%. Meanwhile, the more important core inflation measure slumped by 40 basis points to 1.3% when markets were looking for an unchanged reading of 1.7%. 

Olivier Konzeoue, FX sales trader at Saxo Markets, said: “More MPC Members are singing the same dovish tune and pledging to vote for a rate cut should the economy fail to bounce in Q1 2020. UK CPI printed below expectations, confirming the recent trend of muted inflation and overall softer data. The MPC meeting seems more “live” than ever in January with a 62% probability (up from 50% before the meeting) for a 25bps rate cut, putting further pressure on the ever resilient Great British pound.”

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