23 October 2025: UK Inflation Slows, Raising Hopes For An Early Rate Cut

The annual rate of inflation in September unexpectedly held at the pace of the previous month, raising the chance that Bank of England policymakers could cut interest rates later this year, despite price rises remaining at a level still well above the Central Bank’s target.

Consumer prices were up 3.8% compared with the same month of last year, the Office for National Statistics announced yesterday, almost double the central bank’s 2% target and the same rate as August. Economists expected a rise to 4.0%.

The BOE next meets to decide interest rates on Nov. 6, when investors expect it to keep rates on hold, breaking a pattern of policymakers lowering borrowing costs by a quarter of a percentage point every three months.

However, the BOE had expected inflation to peak at 4% in September. The lower reading might open the way to another rate cut before the end of the year.

Lower food and drink prices dragged on September inflation, which could be a source of comfort for rate setters. Some were worried about the faster rise in food prices this year, since they have a greater influence on inflation expectations, given their frequent purchases.

“The data opens the door for another rate cut this year,” according to Sanjay Raja, chief U.K. economist at Deutsche Bank. “A December rate cut is very much in play.”

However, the BOE’s policymakers are divided on how quickly inflation will cool from here. The Bank’s Chief Economist, Huw Pill, is concerned that inflation will stay high as workers continue to secure significant pay rises.

But another MPC member said earlier this month that there was a growing risk the U.K. might be heading for a recession if inflation fell below target.

Alan Taylor, who is also an economics professor at Columbia University, said the Central Bank’s reticence to lower its key interest rate quickly means the economy is now unlikely to secure a “soft landing” in which inflation falls without the economy contracting or unemployment rising.

Following Andrew Bailey’s concern about two U.S. firms failing last week, Barclays Bank has issued a statement reassuring markets that its exposure is well-managed, with its CEO telling reporters that he runs a “very risk-controlled shop”.

While these words may reassure investors, they are similar to banks’ comments about the subprime mortgage market in 2008.

In yet more “managed leaks” from the Treasury, Chancellor Rachel Reeves is reportedly preparing a sweeping tax measure aimed at high-earning professionals, particularly those working through limited liability partnerships (LLPs) such as law firms, accountancy practices and some medical alliances. The plan, which could raise around £2 billion, is designed to plug a sizeable hole in the public finances, and may form a central plank of the upcoming Budget.

Under current rules, many professionals working through LLPs are treated as self-employed, meaning their firms do not pay employers’ National Insurance contributions on their behalf. The Government argues this creates a tax “inequity” between LLP partners and employees. According to think-tank analysis, closing this loophole could generate around £1.9 billion annually. Some reports say a senior solicitor earning around £316,000 via an LLP could face an extra tax bill of about £23,000 under the proposed changes.

The pound was hit hard by the release of inflation data, which pointed to a sooner-than-expected loosening of monetary policy. It fell to a low of 1.3305, but recovered to close at 1.3357.

The FOMC meeting next week may have a similar “feel” to a UK MPC meeting. The Committee appears split between those who believe that economic growth, as reflected in employment data, warrants a rate cut sooner rather than later, and those who are concerned that lowering rates may reignite inflation, which remains well above the Central Bank’s 2% target.

The Fed Chairman, Jerome Powell, has managed a relatively subtle pivot between holding rates as inflation comes under control and concerns about employment figures.

The entire picture is clouded by the Federal shutdown, which has kept the Office for Employment Statistics closed, leaving the last official data published as the September report.

Policymakers are widely expected to cut the key interest rate to lower borrowing costs and prevent the shaky job market from collapsing. This may be an overly dramatic view of the job market, but there are reasons to believe that job creation has slowed.

Earlier this week, financial markets were pricing in a 97% chance of a quarter-point cut, according to the Fed Watch tool. Economists at Deutsche Bank called the October cut a "done deal" in a commentary on Tuesday.

Fed officials have said they're cutting interest rates to boost the economy and prevent a surge of unemployment. Job growth nearly stalled this summer as tariffs pushed up prices and squeezed consumer budgets.

OpenAI Co-Founder Sam Altman, Meta CEO Mark Zuckerberg, and Federal Reserve Chair Jerome Powell have joined the chorus of voices warning of an AI bubble and expressing concern that the US economy will nosedive when it bursts.

But what would a post-bubble nosedive look like? Given the weakness in almost every other sector of the US economy, it could well mean a recession.

Economic slumps come in many flavours, though, and the worst tend to follow financial crises. Yet, with a few exceptions, most experts have not warned of an AI bubble that could cause an economic crisis. Instead, the conventional wisdom is that if there is a recession, it will look more like the one that followed the dot-com bubble in 2000 than the one following the 2008 global financial crisis.

History does provide some support for this view. One well-known paper on bubbles and financial crises concludes that “the post-WW2 era appears to have weathered numerous equity price bubbles that did not turn into financial crisis episodes.” But the authors also note that equity-price bubbles can precipitate financial crises if they are fuelled by borrowed money.

Federal Reserve Governor Michael Barr used a keynote at DC Fintech Week to praise Congress for finally drawing lines around stablecoin, then immediately warned that the new law’s drafting could open channels for risk and regulatory arbitrage, including a pathway for Bitcoin-linked instruments to sit inside stablecoin reserves with only indirect Federal Reserve visibility.

Many crypto investors, particularly those with considerable fortunes from this market's growth, believe that the naysayers are simply afraid of something they don’t fully understand. Stablecoins and AI can easily be bracketed together as economic “smoke and mirrors” liable to bring the market crashing down.

Barr said “payments innovation is accelerating,” and acknowledged that the newly enacted GENIUS Act “provides some clarity to issuers of stablecoins about how they can fit into the regulatory and supervisory framework,” potentially speeding development of new payment products.

But he stressed that “success in accomplishing these goals will depend on the details of regulatory implementation,” adding bluntly: “Regulators have a lot of work to do to implement the act.”

The dollar ran into some selling interest as it peaked above the 99 level yesterday. Following a rise to 99.14, it fell back to reach a low of 98.79 and closed at 98.91.

Yesterday, European Central Bank President Christine Lagarde backed German Chancellor Friedrich Merz's call for a single European stock exchange to support European listings and economic growth.

"If we are serious about moving forward, we must complete the banking union, and we must apply the same logic, and faster, to capital markets: a single rule-book, a single supervisor, and a consolidation of exchanges," she told a conference.

"So I very much welcome the statements and the comments by Chancellor Merz in support of this direction."

The European Union has been slow to develop the tools it needs to realise its undoubted potential as a significant player in the global equities market. Separate exchanges in Paris, Frankfurt, Amsterdam and Madrid, to name but a few, add to the lack of cohesion, as they deal with individual domestic companies even when they have pan-eurozone operations.

The fact that the bloc hosted 295 trading venues, 14 central counterparties and 32 central securities depositories in 2023 is something that policymakers must “address and consolidate,” she told the Frankfurt Finance & Future Summit yesterday, signalling support for a similar recent push from German Chancellor Friedrich Merz.

“This fragmentation drains liquidity, makes the European market less attractive for listings and pushes firms to seek capital abroad,” according to Lagarde. “This fragmentation comes at a very moment when finance is more vital than ever to Europe’s ambitions,” she added, citing investment needs in renewable energies and security.

Merz last week called for the creation of a pan-European stock exchange as part of a broader push to help companies compete with the US and Asia. German Finance Minister Lars Klingbeil and Bundesbank President Joachim Nagel supported the idea, while both stressed that it would be a decision by the relevant companies.

Lagarde already applauded Merz’s push in Washington last week, saying the chancellor’s call for more unified capital markets “means a lot.” Yesterday, she reiterated that she “very much welcomed” Merz’s statements.

“If we are serious about moving forward, we must complete the banking union, and we must apply the same logic and speed to capital markets, a single rulebook, a single supervisor and consolidation of exchanges,” she said.

In typical EU fashion now, officials will look around bewildered, trying to find a suitable candidate to drive the process forward.

A spokesperson for the German economy ministry said yesterday that the government was concerned about potential supply chain disruptions stemming from a dispute over chipmaker Nexperia.

"We are in contact with all relevant parties and trying to find solutions," the spokesperson said at a regular government press conference.

"Chips are indispensable for our industry, so this could have a major impact."

The German carmakers' association, VDA, warned earlier that the China-Netherlands dispute over Nexperia could significantly disrupt automotive production in the near future.

Despite talks between the Dutch and Chinese economy ministers on Tuesday, no solution to the Nexperia impasse was reached.

France is in trouble.

Its credit rating fell for the third time this month. S&P cut it to A+ as debt climbs toward 121% of GDP. Political deadlock and stalled reforms are raising alarms. Borrowing costs are up, and investors are nervous.

Is France heading the same path Greece took years ago?

Unlike Greece, France is proactively implementing austerity measures, including spending cuts and tax hikes. Still, uncertainty remains over the approval of the 2026 budget amid social unrest and political instability.

The Euro continues to drift as the ECB says it is “satisfied” with the three main drivers of the currency: inflation, growth, and monetary policy. The markets have grown tired of the “French saga”, since they will only act if it looks like it's spreading, which seems unlikely at the moment.

Yesterday, the single currency managed to advance to a high of 1.1622, but it had little or no follow-through and drifted back to close at 1.1610

Have a great day!