Traders add bets on Bank of England rate cut after data shocks

LONDON – Traders are betting on more Bank of England rate cuts this year after weak retail sales data added to the latest set of data surprises this week.

Sales volumes fell 0.3% month-on-month in December, the Office for National Statistics said on Friday, compared to a 0.4% rise predicted in a Reuters poll of economists.

“Cautious spending” dominated over the holiday period, said Nicholas Found, head of business content at consultancy Retail Economics, adding that the figures showed the continuing impact of the cost of living crisis on consumer behaviour.

Following Friday’s release, markets priced in a total of more than 75 basis points of interest rate cuts throughout 2025 from the BOE’s current key rate of 4.75%. This compares with around 65 basis points of cuts expected the previous day, although they were then reduced to 70 basis points later on Friday. The central bank’s next meeting will be on February 6, when a quarter-point cut is widely expected.

The disappointing retail data adds to the UK’s bleak economic outlook and the challenges facing Finance Minister Rachel Reeves, who has made reviving growth and reducing the country’s debt-to-GDP ratio her top goal as she enters her first year. full in office.

Earlier this week, the ONS announced that the UK economy grew only 0.1% in November and stagnated for a period of three months. Meanwhile, inflation cooled more than expected to 2.5%which also drives market bets on the extent of the BOE’s rate cuts this year after 2024. half percentage point reduction.

To further complicate the situation for Reeves, who announced a large scale tax hike package at the end of October with the aim of reducing the deficit, it is the recent volatility in the global bond market that has been keenly felt in the UK. Borrowing costs have decreased this week.The long-term debt premium has hit 27-year highs this month, with short-term yields elevated to levels not seen since the financial crisis.

This has led to the perspective of higher mortgage rates and raised questions about whether Reeves will announce more tax increases or reductions in public spending to comply with their self-imposed tax rules.

“It’s a real challenge for the UK economy at the moment… if you look at where bond yields are in the UK, they are extremely high,” Craig Inch, head of rates and cash at Royal London, told CNBC. Asset Management, to CNBC. Street Signs Europe” on Friday.

“One of the reasons for this is that the UK base rate 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, it definitely “We think they should do it. 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 especially volatile around Christmas and that in December 2023, a monthly decline over the festive period was almost completely reversed with a rebound in January. .

“However, markets currently do not seem to be in the mood to give the UK the benefit of the doubt,” Shaw added, pointing to the falls in sterling against the euro and the US dollar on Friday.