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

LONDON — Traders are betting on further rate cuts from the Bank of England this year after weak retail sales data added to the latest surprises in a series of data this week.

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

“Conservative spending” dominated during the holiday season, said Nicholas Found, head of retail content at consultancy Retail Economics, adding that the figures showed the continued impact of the cost of living crisis on consumer behavior. consumers.

Following Friday’s release, markets have priced in interest rate cuts totaling more than 75 basis points throughout 2025, compared to the Bank of England’s current policy rate. of 4.75%. That compares with cuts of around 65 basis points expected the day before, although that figure then fell back to 70 basis points later on Friday. The next central bank meeting is on February 6, when a quarter-point cut is widely expected.

The disappointing retail data adds to the UK’s bleak economic situation and the challenges facing Finance Minister Rachel Reeves, who has focused on boosting growth and reducing the debt-to-income ratio. The country’s GDP her main focus as she begins her first full year in office.

Earlier this week, the ONS reported that the UK economy grew by just 0.1% in November and was stagnating over a three-month period. At the same time, inflation slowed more than expected to 2.5%, also boosting market bets on the scale of the BoE’s rate cuts this year following the half-point cut in percentage in 2024.

Recent volatility in the global bond market, which has been felt hard in the UK, further complicates the situation for Reeves, who in late October announced a package of large-scale tax increases aimed at reducing the deficit. The premium on long-term debt hit a 27-year high this month, with short-term yields elevated to levels not seen since the financial crisis.

That led to the prospect of rising mortgage rates and raised questions about whether Reeves would announce new tax hikes or government spending cuts to meet her self-imposed budget rules.

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

“One of the reasons for this is that the UK’s base rate is still significantly higher than many markets around the world. So when you talk about what the Bank of England is likely to do when from the February meeting, we think they should definitely cut interest rates, we expect they will have to cut interest rates four times this year.

Philip Shaw, chief economist at Investec, said in a Friday note that retail sales were particularly volatile around Christmas and that by December 2023, a monthly fall during the festive period had been almost entirely reversed by a resumed in January.

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