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In the U.K., Inflation fell sharply to 1.7% in September, below expectations and fueling speculation for a Bank of England rate cut in November. Economists had forecasted a higher rate of 1.9%, marking the first time Inflation dipped below the BOE’s 2% target since April 2021. In August, Inflation stood at 2.2%. Core Inflation, excluding certain categories, dropped to 3.2%, down from 3.6% in August. Price increases in the services sector, a key part of the U.K. economy, also eased to 4.9% in September from 5.6% in August, its lowest level since May 2022.

Market expectations for a November rate cut by the Bank of England soared from 80% to 92% following the latest Inflation data, with a potential further cut in December. Speculation for additional rate reductions this year could bring the BOE’s key rate to 4.5%. The decline in the British pound against the U.S. dollar and euro reflects growing expectations for a more dovish stance from the BOE. Yields on British government bonds, known as gilts, also fell across the board.

Headline Inflation in the U.K. has dropped from a peak of 11.1% in October 2022 to 1.7% in September. Lower fuel prices have contributed to a more moderate Inflation environment, with services Inflation showing signs of easing. However, the increase in the energy price cap and upcoming budget announcements could impact future Inflation levels. Economists have varying predictions on the BOE’s future rate decisions, with some expecting gradual cuts while others anticipate a faster unwinding of restrictive policies.

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