UK faces cut in interest rates as inflation falls to three-year low

Decline blamed on a fall in price of women's clothes and hotel rooms

UK inflation fell to its lowest rate for more than three years in December, increasing speculation that the Bank of England could cut interest rates.

According to the Office for National Statistics (ONS) the Consumer Prices Index (CPI) 12-month rate dropped to 1.3 per cent last month, down from 1.5 per cent in November, which is its lowest rate since November 2016.

This is well below the Bank of England's (BoE) target of 2 per cent, and comes as a shock to most analysts, who forecast another 1.5 per cent increase.

In the wake of the data, the pound was 0.19 per cent lower against the dollar at $1.2995, while British government bond prices shot up.

The decline has been blamed on hotels slashing prices, with a third of hotels reporting falling prices in December, while women’s clothing prices also fell, the ONS said.

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The struggling British economy adds to mounting evidence that a rate cut could come as soon as the end of the month.

Michael Saunders, one of the rate setters on the Bank's Monetary Policy Committee (MPC) said: "It probably will be appropriate to maintain an expansionary monetary policy stance and possibly to cut rates further, in order to reduce risks of a sustained undershoot of the 2 per cent inflation target.”

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