- GDP shrinks again but analysts say the bank is more concerned about inflation
The pound fell back from recent highs on Friday after fresh data showed the economy shrank for a second consecutive month.
Data from the office for National Statistics showed a 0.1 per cent GDP decline for October, below expectations of 0.1 per cent growth and following a 0.1 per cent fall the prior month.
Sterling fell as much as 0.4 per cent against the dollar in the wake of the announcement before recovering to trade 0.2 per cent lower at $1.26 by midday, having added around 1 per cent since the end of November.
The move lower reflected higher expectations among investors for the pace and volume of Bank of England base rate cuts.
Rob Morgan, chief investment analyst at Charles Stanley, said: ‘Today’s weak number marginally increases the chance of a further cut to interest rates 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 policy makers preoccupied with inflation.
Governor Andrew Bailey is likely more focused on inflation than growth, say analysts
While bets on a rate cut grew on Friday, market pricing still suggests investors expect the BoE to hold off on 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 prompt a further cut again at its December meeting.
‘With stubbornly high wage growth, elevated services CPI inflation and uncertainty on how much of the employer national insurance contribution (NIC) hike will be passed on in the form of higher prices, [this is] keeping Monetary Policy Committee (MPC) members in wait and see mode.’
CPI came in at an unexpectedly high 2.3 per cent for the 12 months to October, up from 1.7 per cent the prior month, as core inflation jumped to 3.3 per cent.
BoE Governor Andrew Bailey has repeatedly expressed concern about the potential for an inflationary resurgence. Fresh CPI data is for November due next week.
Thomas Pugh, economist at RSM UK, said: ‘There are also a series of risks on the horizon that could materially increase inflation.
‘The geopolitical situation in the Middle East and Russia is clearly volatile; it’s unclear how much of the increase in costs from the budget firms will try to pass on; and new economic policies in the US could raise inflation in the UK either through the impact of tariffs or via a stronger dollar.
‘Ultimately, the MPC is likely to decide that the risk of inflation rising again and becoming entrenched, outweighs the risk that the economy is slowing.’
Pugh expect the Bank of England’s base rate will fall to 3.5 per cent by the end of next year, 125 basis points below its current level of 4.75 per cent, while AXA IM’s Dickens think it will stop at 3.75 per cent.
Dickens said: ‘We think the risks to the ‘gradual’ pace of cuts laid out by policymakers recently, are tilting evermore to the downside.
‘While a pick-up in government consumption next year will boost growth, the fact that interest rates remain in restrictive territory will continue to limit any recovery on households’ spending at a time when global uncertainty is increasing.
‘We see four cuts next year – one per quarter’
Expectations for the pace and scale of BoE rate cuts have fallen back as economic data has worsened
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