Traders add to bets on Bank of England rate cuts after data shock

LONDON – Traders were betting on more rate cuts from the Bank of England this year after weak retail sales data added this week.

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

“Prudent spending” prevailed over the holiday season, 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 release, markets priced a total interest rate cut in 2025 of more than 75 basis points from the BOE’s current key rate of 4.75%. That compares with 65 basis points of cuts expected the previous day, although it later dropped to 70 basis points on Friday. The central bank next meets on February 6, when a quarter-point cut is expected.

The disappointing retail figures add to a murky UK economic picture and the challenges facing Chancellor of the Exchequer Rachel Reeves, who has made restarting growth and reducing the country’s debt-to-GDP a top priority as she enters her first full year in office.

Earlier this week, the ONS announced the UK economy It grew by just 0.1% in November and it stopped within three months. While inflation it cooled more than expected to 2.5%also encouraging market bets on the extent of BOE rate cuts this year after 2024. a half percent reduction.

Further complicating the picture for Reeves, he announced a big package of tax increases It is the volatility of the global bond market that has been very noticeable in the UK lately with the aim of reducing the deficit at the end of October. borrowing costs eased this weeklong-term debt premiums hit 27-year highs this month, while short-term yields rose to levels not seen since the Financial Crisis.

This has brought hope higher mortgage rates and raised questions about whether Reeves will announce more tax increases or cuts in public spending to comply with the fiscal rules established by himself.

“It’s a real challenge for the UK economy at the moment … you look at where UK bond yields are and they’re very high,” Craig Inches, head of rates and treasuries 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 in many markets around the world, so when you come to talk about what the Bank of England would do at the February meeting, we certainly think they will cut interest rates, our forecast is that they should cut them four times this year interest rates”.

Philip Shaw, chief economist at Investec, said in a note on Friday that retail sales had been particularly volatile around Christmas and in December 2023, the monthly fall over the festive period had almost completely reversed with a rise in January.

“The market doesn’t seem to be willing to give the UK the benefit of the doubt at the moment,” added Shaw, pointing to falls in sterling against the euro and US dollar on Friday.