After the data shock, traders add to the Bank of England

LONDON – Traders are betting on more cuts from the Bank of England this year after weak retail sales data this week added to the surprises of the latest data run.

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

“Cautionary spending” dominated during the holiday period, said Nicholas Found, head of business content at consultancy Retail Economics, and the figures showed the continued impact of the cost-of-living crisis on consumer behaviour.

Following Friday’s release, interest rate cuts for all 75 major markets in 2025 are above the BOE’s current key rate of 4.75 percent. That compares with expectations of around 65 basis points of decline the previous day, although this eased to around 70 basis points later on Friday. The central bank will meet next February 6, a quarter-point cut is widely expected.

This disappointing retail data adds to the weak economic outlook in the UK and the challenges facing Finance Minister Rachel Reeves.

Earlier this week, the ONS announced that the UK economy grew by just 0.1% in November, a three-month flat. Meanwhile, inflation eased to 2.5% more than expected, raising market bets on the extent of the BOE rate cut this year after a half-percentage point cut in 2024.

Further complicating the picture for Reeves, who announced massive tax hikes in late October to reduce the deficit, is the volatility in global bond markets, which has been strongly felt in the UK recently, with borrowing costs falling this week. Long-term debt yields hit a 27-year high this month, while short-term yields rose to levels not seen since the financial crisis.

This has led to higher debt levels and raised questions about whether Reeves will announce further tax increases or cut public spending to meet her self-imposed fiscal policies.

“It’s a real challenge for the UK economy at the moment,” Craig Inch, head of prices and cash at Royal London Asset Management, told CNBC. Street Signs Europe” Friday.

One of the reasons for this is that UK base rates are still much higher than many markets around the world, so when they come to talk about what the Bank of England might do at their February meeting, we think they should definitely do it. They will 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 the monthly decline over the festive period in December 2023 had been fully reversed in January.

“At the moment markets don’t seem to be in the mood to give the UK the benefit of the doubt,” Shaw added, adding that sterling was lower against the euro and US dollar on Friday.