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British Inflation saw a significant slowdown in September, with key indicators monitored by the Bank of England also showing a decrease. This has led to increased speculation about a potential interest rate cut in November and has provided support for finance minister Rachel Reeves ahead of her upcoming budget announcement.

Inflation dipped to 1.7% annually in September, down from 2.2% in August, marking the lowest level since April 2021. Factors contributing to this decline included lower airfares and petrol prices, as reported by the Office for National Statistics. The actual figure of 1.7% came in lower than the 1.9% expected by economists in a Reuters poll.

Following this news, the pound weakened against the U.S. dollar and the euro. Interest rate futures indicated a 90% probability of two quarter-point rate cuts by the end of the year, up from an 80% likelihood just a day earlier.

The decrease in Inflation has raised the likelihood of a rate cut at the Bank of England’s November meeting, according to Martin Swannell of EY ITEM Club. The focus now shifts to the pace of subsequent rate cuts, pending further positive developments in pay growth and Inflation.

Recent data also showed a slowdown in British wage growth and a decrease in job vacancies, further supporting the case for a rate cut. This Inflation trend aligns well with Reeves’ budget planning, providing more room for investment in public services and infrastructure without causing concern among investors.

While the upcoming budget announcement on October 30 will play a crucial role in the decision-making process for Interest rates, the lower-than-expected Inflation figure for September may impact social benefit adjustments and offer additional flexibility for budget allocations.

Core Inflation, excluding certain categories like energy and food, dropped to 3.2% from 3.6% in August. Services Inflation, a key factor for the BoE, also receded to 4.9% in September, its lowest level since May 2022. However, this decline was largely attributed to a sharp decrease in airfares.

Looking ahead, the BoE will take into account various factors, including factory prices which saw a 0.7% decline year-on-year in September. This downtrend indicates weaker inflationary pressure moving forward, potentially influencing future policy decisions at the Bank.

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