Traders are expecting more rate cuts from the Bank of England this year after weak retail sales data added to a string of data surprises this week.
Total sales fell 0.3% month-on-month in December, the Office for National Statistics (ONS) said on Friday, compared with a 0.4% rise forecast in a Reuters poll of economists.
After Friday’s announcement, markets were pricing in more than 75 basis points of rate cuts over the course of 2025, from the BOE’s current key rate of 4.75%. This compares with around 65 basis points of cuts expected a day earlier, although this figure had fallen back to around 70 basis points by late Friday. The central bank’s next meeting is on February 6, where a quarter-point cut is widely expected.
The disappointing retail sales data added to the gloomy picture of the UK economy and the challenges facing Chancellor of the Exchequer Rachel Reeves, who has made restoring economic growth and reducing the country’s debt-to-GDP ratio a key focus as she enters her first full year in office.
Earlier this week, the ONS announced that the UK economy grew by just 0.1% in November, unchanged from three months earlier. Inflation fell more than expected to 2.5%, boosting market confidence in the extent of the BOE’s rate cut this year after a half-point cut in 2024.
The situation has been made more complicated for Reeves, who announced a package of massive tax increases in late October aimed at reducing the deficit. Volatile global bond markets, which have had a major impact on the UK, have added to the pressure. While borrowing costs have eased this week, the premium for long-term debt hit a 27-year high this month, with short-term yields rising to levels not seen since the Financial Crisis.
This raises the prospect of higher mortgage rates and raises questions about whether Reeves will announce additional tax increases or public spending cuts to meet his own fiscal rules.
Philip Shaw, chief economist at Investec, said in a note on Friday that retail sales are very volatile around Christmas and that in December 2023, the large monthly decline during the festive period was almost fully recovered by an increase in January.
