UK inflation falls sharply to 1.7%, below Bank of England's target for first time in over three years

LONDON — Inflation in the U.K. dropped sharply to 1.7% in September, the Office for National Statistics said Wednesday, ramping up market expectations for a Bank of England rate cut in November.

Economists polled by Reuters had expected the headline rate to come in at a higher 1.9% for the month, in the first dip below the BOE's 2% target since April 2021.

Inflation has been hovering around that level for the last four months, and came in at 2.2% in August.

Core inflation, which excludes energy, food, alcohol and tobacco, came in at 3.2% for the month, down from 3.6% in August and below the 3.4% forecast of a Reuters poll.

Price rises in the services sector, the dominant portion of the U.K. economy, eased significantly to 4.9% last month from 5.6% in August, now hitting its lowest rate since May 2022.

Core and services inflation are key watch points for Bank of England policymakers as they mull whether to cut interest rates again at their November meeting.

Money market pricing for a 25-basis-point November rate cut jumped from 80% to 92% following the latest inflation print, with a follow-up trim in December nearly fully priced in. Analysts had on Tuesday said lower wage growth reported by the ONS this week supported the case for a rate cut.

Two more quarter-percentage-point reductions this year would take the BOE's key rate to 4.5%, after the central bank kicked off rate cuts in August, then held in September.

A fall in the British pound following the publication on Wednesday reflected more dovish expectations for the BOE, with sterling down 0.6% against the U.S. dollar at $1.299, falling below the $1.3 level for the first time since Sept. 11. The British currency moved 0.5% lower against the euro.

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