Piccadilly Circus at dusk, on January 7, 2025, in London, England.
Richard Baker | In pictures | Getty Images
LONDON – Traders are betting on more interest 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.
The Office for National Statistics said on Friday that sales volumes fell 0.3% on a monthly basis in December, compared to expectations for a 0.4% increase in a Reuters poll of economists.
“Cautious spending” dominated the holiday period, said Nicholas Fund, head of business content at Retail Economics, adding that the numbers showed the continued impact of the cost of living crisis on consumer behavior.
Following Friday's release, markets have priced in a total of more than 75 basis points of interest rate cuts throughout 2025 from the Bank of England's current key interest rate of 4.75%. This compares to about 65 basis points of cuts expected the previous day, although this then eased by about 70 basis points later on Friday. The central bank next meets on February 6, when it is widely expected to make a quarter-point cut.
Disappointing retail data adds to the UK's bleak economic picture and to the challenges facing Finance Minister Rachel Reeves, who has made revitalizing growth and lowering the country's debt-to-GDP ratio her main focus as she enters her first full year in office.
Earlier this week, the Office for National Statistics announced that the UK economy It grew by just 0.1% in November and stagnation over a three-month time period. Inflation in the meantime Cooling up to 2.5% more than expectedwhich also reinforces market bets on the extent of interest rate cuts from the Bank of England this year beyond 2024 Reduced by half a percentage point.
Which further complicates the picture for Reeves, who announced… A wide-ranging package of tax increases In late October with the aim of reducing the deficit, there are recent fluctuations in the global bond market, which has had a sharp impact in the United Kingdom while Borrowing costs fell this weekLong-term debt premiums rose to their highest levels in 27 years this month, with short-term yields rising to levels not seen since the financial crisis.
This has led to a possibility High mortgage rates It raised questions about whether Reeves would announce more Increase taxes or reduce public spending To meet self-imposed financial rules.
“It's a real challenge for the UK economy at the moment,” Craig Enches, head of interest rates and cash at Royal London Asset Management, told CNBC. “When you look at UK bond yields, they are very high.” “Street Signs Europe” on Friday.
“One of the reasons for this is that the UK policy rate is still much higher than many markets around the world, so when you talk about what the Bank of England is likely to do at its February meeting, we certainly think it should do that.” Cutting interest rates, our expectation is that they will have to cut interest rates four times this year.”
Retail sales have been particularly volatile around Christmas, and that in December 2023, the monthly decline over the festive period was almost completely reversed by the rise in January, Philip Shaw, chief economist at Investec, said in a note on Friday.
“At the moment, markets do not appear to be in the mood to give the UK the benefit of the doubt,” Shaw added, pointing to the pound's declines against the euro and US dollar on Friday.
