The latest UK CPI data for November presented weaker figures than anticipated, with the annual rate falling to 3.2%, which is 0.3 percentage points below the consensus. Overall services inflation slightly dropped to 4.4%, with housing services and rents slowing while travel and transport rose.
Concerns remain within the MPC about ‘sticky’ underlying inflation pressures, as the BoE’s underlying services measure increased to 4.1%. This CPI report may ease overall inflation worries, especially with deteriorating labour demand shown by jobs data.
Monetary Policy Implications
Before this week’s data, a close 5-4 vote was anticipated favouring a rate cut, with possible support from Governor Bailey. Now, up to a 7-2 vote favouring a cut seems possible, though resistance due to underlying inflation may persist. The BoE still has more to reduce than other G10 central banks.
February’s inflation forecasts are expected to be lower, suggesting another possible cut. This is not currently factored into the market, which might result in lower front-end yields, applying downward pressure on the pound. An increase in EUR/GBP is expected over the coming months.
The surprisingly weak inflation data we saw back in November 2024 was the catalyst that confirmed the Bank of England’s easing cycle. That sharp drop in the annual rate to 3.2% removed any doubt and prompted the first of several rate cuts. We are still navigating the consequences of that policy pivot today.
Fast forward to now, and the latest ONS data released this morning for November 2025 shows headline CPI at 2.1%, but the core issue of sticky services inflation persists, coming in at a stubborn 3.8%. This mirrors the concerns from a year ago, where sticky underlying pressures kept some MPC members hawkish. This dynamic suggests the final steps in taming inflation will be the most difficult.
Market Outlook
This persistent services inflation is happening alongside a clear economic slowdown, with third-quarter GDP growth for 2025 confirmed at a mere 0.1%. With the economy stalling, the MPC has more reason to prioritize growth over wringing out the last bit of inflation. This reinforces the view that the BoE still has more cutting to do than its G10 peers.
For derivative traders, this outlook suggests positioning for lower front-end UK yields over the coming weeks. As the interest rate differential between the UK and other economies like the Eurozone widens, the pound will face increased downward pressure. We see continued scope for EUR/GBP to move higher into the new year.
