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

LONDON – Traders are betting on more 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.

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

“Prudent spending” dominated during the holiday period, said Nicholas Found, head of business content at consultancy Retail Economics, adding that the figures show the continued impact of the cost of living crisis on the behavior of the consumers.

After Friday’s release, markets are pricing in a total of more than 75 basis points of interest rate cuts through 2025 from the BOE’s current key rate of 4.75%. That compares to around 65 basis points of cuts expected the previous day, although it was then reduced to around 70 basis points later on Friday. The central bank meets next on February 6, when a quarter point cut is widely expected.

The disappointing trade data added to the gloomy economic picture in the UK and to the challenges faced by Chancellor of the Exchequer Rachel Reeves, who has made it possible to restart growth and cut the debt ratio of the country to GDP his main focus as he enters his first full year in office.

Earlier this week, the ONS announced that the UK economy grew by only 0.1% in November and stagnated over a period of three months. Inflation meanwhile cooled more than expected to 2.5%further increasing market bets on the extension of BOE rate cuts this year beyond 2024 half percentage point reduction.

It also complicates the press for Reeves, who announced a large-scale package of tax increases at the end of October aimed at reducing the deficit, it is the recent volatility in the global bond market that has been strongly felt in the United Kingdom While borrowing costs fell this weekThe premium on long-term debt climbed to 27-year highs this month, with short-term yields rising to levels not seen since the Financial Crisis.

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

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

“One of the reasons for that is that the base rate of the United Kingdom is still significantly higher than many markets in the world, so when you come to talk about what the Bank of England has to do to the February meeting, we definitely think they should cut interest rates, our forecast is that they will 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, a monthly dip during the festive period was almost completely offset by a rise in January.

“Currently, though, the markets don’t seem to be in the mood to give the UK the benefit of the doubt,” added Shaw, pointing to the decline in sterling against the euro and the US dollar on Friday.