More interest rate cuts expected as inflation remains at 2.1%

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Better-than-expected inflation figures brought some cheer to the market yesterday as economists reiterated their predictions for an early cut in interest rates.

The Office for National Statistics revealed that consumer price inflation, the Government's target measure for inflation in the UK, was stable at 2.1 per cent in November, unchanged from October and below analyst forecasts of 2.2 per cent. The number was also well below public expectations, which pegged the current rate at 3.2 per cent, according to a Bank of England survey of public attitudes to inflation.

The ONS said that fewer increases in gas and electricity bills had helped keep inflation down, along with a fall in air fares, the cost of vehicle maintenance and better deals in hotels and restaurants, particularly staff canteens, where prices rose less than last year. Financial services, where the cost of exchanging currency fell a year ago, and the price of heating oil, which climbed on the back of movements in the crude oil market, propped up the inflation figure, which came in slightly above the Bank of England's target of 2 per cent.

Howard Archer, an economist at Global Insight, said the data would have brought "some welcome festive cheer for the Bank of England".

"November's lower-than-expected inflation data keeps the door open for another interest rate cut early in 2008," he said in a note. "We currently expect interest rates to be cut by a further 25 basis points in both February, to 5.25 per cent, and May, to 5 per cent. Furthermore, it is highly possible that interest rates could move below 5 per cent in the second half of 2008."

Russell Silberstone, an economist at Investec Asset Management, and Michael Saunders, an economist at Citigroup, said they also expected interest rates to fall next year as the economy slows down but, Mr Silberstone added: "The Bank will need to be careful. Inflation is expected to edge upwards in the coming months."

The ONS also said that business investment for the third quarter of this year was 6.6 per cent higher than last year, and 2 per cent ahead of the previous quarter. Mr Archer said that the upward trend was expected, but added that "business investment will be increasingly pressurised going forward," citing the credit crunch and another Bank of England survey which said that "for a non-trivial minority of companies, it had become more difficult to refinance existing debt, or to finance new projects with uncertain cash flow."

Like most other analysts, Mr Archer expects the decline in investment to be a factor in a wider economic slowdown, estimating a cut in UK GDP growth to 1.9 per cent in 2008, from 3.1 per cent in 2007.