Will the Bank of England cut interest rates next week? Here’s why it now seems more plausible

The pound retreated from recent highs on Friday after new data showed the economy contracted for the second straight month.

Data from the Office for National Statistics showed GDP fell 0.1 percent in October, below expectations for 0.1 percent growth and following a 0.1 percent fall the previous month.

Sterling fell as much as 0.4 percent against the dollar following the announcement before recovering to trade 0.2 percent lower at $1.26 at midday, having added about 1 percent since late November.

The move lower reflected higher expectations among investors about the pace and size of the Bank of England’s base rate cuts.

Rob Morgan, chief investment analyst at Charles Stanley, said: “Today’s weak figure marginally raises the possibility of a further interest rate cut at the Bank of England’s December meeting next week.”

However, he added, the bank’s monetary policy committee is more likely to opt for a pause, with the attention of policymakers concerned about inflation.

While bets on a rate cut increased on Friday, market prices still suggest investors expect the Bank of England to postpone further easing until its February or March meetings.

Gabriella Dickens, G7 economist at AXA Investment Managers, said: ‘The recent weakness in activity is unlikely to be enough to trigger a further cut at their December meeting.

“With persistently high wage growth, high services CPI inflation and uncertainty over how much of the increase in employers’ National Insurance Contribution (NIC) will be passed on in the form of higher prices, (that is) keeping members of the Monetary Policy Committee (MPC) in Wait and See Mode.’

The CPI hit an unexpectedly high 2.3 percent for the 12 months to October, up from 1.7 percent the previous month, while core inflation jumped to 3.3 percent.

Bank of England Governor Andrew Bailey has repeatedly expressed concern about the possibility of an inflationary resurgence. New CPI data for November will be published next week.

Thomas Pugh, economist at RSM UK, said: ‘There are also a number of risks on the horizon that could materially increase inflation.

‘The geopolitical situation in the Middle East and Russia is clearly volatile; It is unclear how much of the cost increases budget companies will try to pass on; and new economic policies in the United States could increase inflation in the United Kingdom, either through the impact of tariffs or through a stronger dollar.

“Ultimately, the MPC is likely to decide that the risk of inflation rising again and consolidating outweighs the risk that the economy is slowing.”

Pugh expects the Bank of England’s base rate to fall to 3.5 percent by the end of next year, 125 basis points below its current level of 4.75 percent, while AXA IM’s Dickens believes it will stop at 3.75 percent.

Dickens said: ‘We believe the risks to the ‘gradual’ pace of cuts recently set out by policymakers are tilting increasingly to the downside.

‘While a rebound in public consumption next year will boost growth, the fact that interest rates remain in restrictive territory will continue to limit any recovery in household spending at a time when global uncertainty is increasing.

‘We anticipate four cuts next year, one per quarter’