UK inflation has plummeted to 1.7%, below the Bank of England's (BoE) target for the first time in three years, sending shockwaves through the money markets, which now indicate a 91% probability of a quarter-point interest rate cut at the BoE’s upcoming meeting in early November.

Just before the latest inflation figures came out, traders saw an 80% chance of the BoE cutting rates. Money markets now predict a 91% chance of a quarter-point cut from the Bank of England at its next meeting in early November. If markets are correct, Threadneedle Street would reduce the UK interest rate from 5% to 4.75%.

Earlier this month, BoE governor Andrew Bailey hinted at a potentially “more aggressive” approach to interest rate cuts, contingent on continued positive inflation trends.

“Price pressures continue to recede in the UK,” said Debapratim De, director of Economic Research at Deloitte. “Softening wage growth and services pricing indicate further easing in the coming months. With inflation in retreat and UK growth slowing, the Bank of England is likely to follow its August rate cut with another 25 basis point reduction in November.”

Read more: UK inflation drops below 2% target for first time since 2021

Tuesday’s data revealed a slowdown in wage growth, which could further encourage the BoE to implement a rate cut. Gora Suri, economist at PwC, also said that the likelihood of a November rate cut has strengthened. “The headline CPI inflation came in at 1.7% in September, primarily driven by declines in motor fuels and airfares. This trend suggests we may be at the tail end of the disinflationary process, which is positive for policymakers, consumers, and businesses.”

Markets also noted a significant decline in services inflation, which fell from 5.6% in August to 4.9% in September, marking its lowest level since May 2022. Analysts had anticipated a drop to 5.2%. Also, core inflation, excluding volatile food and energy prices, dropped more than expected from 3.6% to 3.2%.

Paul Dales, chief UK economist at Capital Economics, warned that most of the bigger fall in core inflation and services inflation was due to the sharp drop in airfares inflation “which the Bank won’t consider a sign that domestic price pressures are becoming less persistent”.

He added: “Overall, a 25 basis points cut in interest rates from 5% to 4.75% at November’s policy meeting already seem nailed on before today’s release.

“The chances of that being immediately followed by another 25bps cut at the following meeting in December has just gone up. At the moment, though, we think the Bank will keep rates on hold at the meeting.