Piccadilly Circus seen at dusk, January 7, 2025, in London, England.
Richard Baker | In pictures | Getty Images
LONDON – Traders are betting on further interest rate cuts from the Bank of England this year after weak retail sales data added to the latest in a string of data surprises this week.
Sales fell 0.3% month-on-month in December, the Office for National Statistics said on Friday, compared with a 0.4% rise forecast in a Reuters poll of economists.
The holiday season was dominated by “cautious spending”, said Nicholas Found, head of commercial content at consultancy Retail Economics, adding that the figures showed the continued impact of the cost of living crisis on consumer behaviour.
After Friday’s announcement, markets priced in a total of more than 75 basis points worth of interest rate cuts through 2025 from the BOE’s current key rate of 4.75%. That compared with about 65 basis points of cuts expected the previous day, although it returned to 70 basis points later on Friday. The central bank next meets on February 6, when a quarter-point cut is widely expected.
Disappointing retail sales figures add to the bleak economic picture in the UK and the challenges facing Chancellor of the Exchequer Rachel Reeves, whose main focus is reviving growth and reducing the government’s debt-to-GDP ratio as she enters her first full year in office.
Earlier this week, the ONS announced that the UK economy rose by only 0.1% in November and stagnated for three months. Meanwhile, inflation cooled more than expected to 2.5%also increasing market bets on the extent of BOE rate cuts this year beyond 2024. a decrease of half a percentage point.
Further complicating the picture for Reeves, who announced a a big package of tax increases at the end of October with the aim of reducing the deficit, the recent volatility in the global bond market has been acutely felt in the United Kingdom. borrowing costs decreased this weekthe premium on long-term debt hit a 27-year high this month, with short-term yields pushed to levels not seen since the financial crisis.
This led to an opportunity higher mortgage rates and raised questions about whether Reeves would publish further tax increases or public spending cuts fulfill its self-imposed fiscal rules.
“It’s a real challenge for the UK economy at the moment … you look at where UK bond yields are 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 significantly higher than many markets around the world, so when we talk about what the Bank of England is likely to do at the February meeting, we definitely think they should cut interest rates , our forecast is that they will have to 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 around Christmas and that in December 2023, the monthly fall over the holiday period was almost completely reversed by a rise in January.
“At the moment the markets don’t seem to be in a mood to favor the UK,” Shaw added, pointing to sterling’s slide against the euro and US dollar on Friday.
