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Piccadilly in London, England at dusk on January 7, 2025.
Richard Baker | In pictures | Getty Images
LONDON — Traders are betting on more rate cuts from the Bank of England this year after weak retail sales data added to the latest in a series of data surprises this week.
Sales fell 0.3% in December from the previous month, the Office for National Statistics said on Friday, compared with forecasts for a 0.4% rise in a Reuters poll of economists.
“Discretionary spending” dominated the holiday season, said Nicholas Fund, head of commercial content at consultancy Retail Economics, adding that the figures show the lingering impact of the cost-of-living crisis on consumer behaviour.
After Friday’s release, markets priced interest rate cuts totaling more than 75 basis points through 2025 from the Bank of England’s current key rate of 4.75%. That compares with about 65 basis points of cuts expected the previous day, although that eased to 70 basis points later on Friday. The next meeting of the central bank will be held on February 6, when it is expected to decrease by a quarter of a point.
Disappointing retail data adds to Britain’s bleak economic picture and raises challenges facing Chancellor of the Exchequer Rachel Reeves, who has made restoring growth and reducing the country’s debt-to-GDP ratio a top priority as she enters her first full year in office.
Earlier this week, the ONS announced that the UK economy in November it grew by only 0.1%. and groaned for three months. Inflation meanwhile cools more than expected by up to 2.5%also increasing market rates by the extent of the Bank of England’s rate cut this year after 2024 a decrease of half a percentage point.
Even more complicated the picture for Reeves, who announced a a massive tax hike package at the end of October, aimed at reducing the deficit, the recent volatility in the global bond market, which was acutely felt in the UK. borrowing costs fell this weekthe premium on long-term debt hit a 27-year high this month, while short-term yields rose to levels not seen since the financial crisis.
This brought perspective higher mortgage rates and raised questions about whether Reeves would announce next raising taxes or cutting government spending to comply with its self-imposed fiscal rules.
“It’s a real challenge for the UK economy at the moment … you look at UK bond yields and they’re extremely high,” Craig Inches, head of rates and cash at Royal London Asset Management, told CNBC. Street Signs Europe” on Friday.
“One of the reasons for that is that the base rate in the UK is still much higher than in many markets around the world, so when you start talking about what the Bank of England might do at the February meeting, we certainly think that they should cut interest rates, our forecast is that they should cut interest rates four times this year.”
Philip Shaw, chief economist at Investec, said in a note on Friday that retail sales were particularly volatile over Christmas and that in December 2023, the monthly fall during the festive period was almost completely reversed by a rise in January.
“At the moment the markets don’t seem to be in a mood to give Britain the benefit of the doubt,” Shaw added, pointing to sterling’s decline against the euro and the US dollar on Friday.
