Home Money Bank of England’s February rate cut a ‘safe bet’ as growth stumbles and inflation falls

Bank of England’s February rate cut a ‘safe bet’ as growth stumbles and inflation falls

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Pressure on Bank of England to cut base rate again as growth stumbles

The Bank of England looks set to resume cutting interest rates next month after official data revealed weaker inflation and anemic economic growth.

Economic output expanded just 0.1 percent in November, the Office for National Statistics said on Thursday, missing forecasts of 0.2 percent but marking a return to growth after two straight months of contraction.

The growth, which appears to have stalled in the second half of 2024, was driven by the services and construction industries, which offset a third consecutive monthly decline in manufacturing production.

Expectations about the pace and scale of the Bank of England’s base rate cuts were gradually revised downwards in the second half of last year, as strong wage growth and services inflation weighed on the mission. of the bank to return the consumer price index to its 2 percent target.

The CPI, which has remained above the target for several months, fell from 2.6 percent in November to 2.5 percent in December.

The bank opted for two rate cuts of 25 basis points each last year, bringing the base rate to its current level of 4.75 percent by the end of 2024.

Luke Bartholomew, deputy chief economist at abrdn, said: “As inflation eased yesterday, the current weakness in growth will further tip the Bank of England towards further easing at its next meeting in February.”

However, he warned that it was “difficult to see” the bank “moving away from its ‘gradual’ mantra towards “a faster easing cycle”.

Pressure on Bank of England to cut base rate again as growth stumbles

Traders now expect to see cuts of between two and three-quarter points in 2025, taking the base rate to a low of 4 percent by the end of the year.

Bank of England Governor Andrew Bailey has openly expressed concern about the possibility of a return to sky-high inflation.

Will 2025 be another year of weak growth?

Thomas Pugh, British economist at RSM UK, agreed that the combination of weaker-than-expected inflation and economic growth “means an interest rate cut in February is now a safe bet.”

It noted the better performance of consumer-facing businesses, suggesting Britons are “gradually becoming more comfortable spending again”.

However, Pugh warned that the economic outlook for this year remains precarious.

He said: ‘There are still good reasons to expect growth to pick up this year.

‘The increase in public spending and investment announced in the Budget should begin to materialize and early signs of a revival in consumer spending should continue.

“But the lack of momentum to start the year increases the risk that 2025 will fall short of expectations.”

The most recent available forecasts published by HM Treasury show that the City expects inflation and GDP growth to average 2.5 and 1.3 per cent respectively in 2025.

Services and construction sectors offset another decline in manufacturing

Services and construction sectors offset another manufacturing sector decline

UBS, HSBC and HSBC appear to be the most optimistic about GDP performance, predicting growth of 1.5 percent, while JP Morgan appears most pessimistic with a forecast of just 0.8 percent.

The Office of Budget Responsibility in October forecast 2 percent growth by 2025.

Scott Gardner, investment strategist at JP Morgan-owned Nutmeg, said weak sentiment towards the UK “represented by recent instability in financial markets” could “provide a headwind” to the country’s growth ambitions.

He added: “Despite this change in sentiment, the outlook for the UK is bright with the economy forecast to grow faster in 2025 than its European peers, including France and Germany.”

‘A possible increase in property market activity in the run-up to April’s stamp duty changes could provide a tailwind for the economy.

“While we remain in ‘wait and see’ mode over potential US trade tariff announcements, if they come to fruition, they are expected to have a greater impact on the UK’s European neighbours.”

City forecasts for GDP growth in 2025

City forecasts for GDP growth in 2025

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