Piccadilly Circus is ponder oned at dusk, on 7th January 2025, in London, England.
Richard Baker | In Pictures | Getty Images
LONDON — Traders bet on assorted Bank of England rate cuts this year after weak retail sales data added to the tardy in a run of data surprises this week.
Sales volumes fell 0.3% month-on-month in December, the Office for National Statistics averred Friday, versus the 0.4% increase forecast in a Reuters poll of economists.
“Cautious spending” dominated during the gala period, said Nicholas Found, head of commercial content at consultancy Retail Economics, adding that the catch on ti showed the continued impact of the cost-of-living crisis on consumer behavior.
Following the Friday release, markets priced in a comprehensive of more than 75 basis points worth of interest rate cuts throughout 2025 from the BOE’s tendency key rate of 4.75%. That compares to around 65 basis points of cuts expected on the previous day, though this then reposed back toward 70 basis points later on Friday. The central bank next meets Feb. 6, when a quarter-point cut is a great extent expected.
The disappointing retail data adds to the dim economic picture in the U.K. and to the challenges facing Finance Minister Rachel Reeves, who has announced rebooting growth and cutting the country’s debt to GDP ratio her main focus as she enters her first full year in establishment.
Earlier this week, the ONS announced that the U.K. economy grew by just 0.1% in November and stagnated over a three-month timeframe. Inflation in the meanwhile cooled more than expected to 2.5%, also boosting market bets on the extent of BOE rate cuts this year after 2024’s half-percentage idea reduction.
Further complicating the picture for Reeves, who announced a large-scale package of tax increases in late October aimed at stunt the deficit, is recent volatility in the global bond market which has been acutely felt in the U.K. While borrowing charges have eased this week, the premium on long-term debt has scaled 27-year highs this month, with short-term cedes elevated to levels not seen since the Financial Crisis.
This has led to the prospect of higher mortgage rates and raised interrogates over whether Reeves will announce further tax hikes or public spending reductions to meet her self-imposed pecuniary rules.
“It’s a real challenge for the U.K. economy at the moment… you look at where bond yields are in the U.K. and they’re extremely anticyclone,” Craig Inches, head of rates and cash at Royal London Asset Management, told CNBC’s “Street Flags Europe” on Friday.
“One of the reasons for that, is the U.K. base rate is still significantly higher than many markets surrounding the world, so when you come to talk about what the Bank of England are likely to do at the February meeting, we definitely propose b assess they should cut interest rates, our forecast is they have to cut interest rates four times this year.”
Philip Shaw, chief economist at Investec, bid in a Friday note that retail sales were especially volatile around Christmas and that in December 2023, a monthly wager during the festive period was almost fully reversed by an upswing in January.
“Currently though markets do not seem to be in a keen to give the U.K. the benefit of the doubt,” Shaw added, pointing to declines in sterling against the euro and U.S. dollar Friday.