December interest rate cut is ‘nailed on’ after UK GDP shrank in October<\/p>\n
Economists are convinced that the Bank of England will respond to the UK\u2019s weak economic performance by cutting interest rates next week.<\/p>\n
The Bank\u2019s monetary policy committee will make its final decision of the year on Thursday 18th December, and a rate cut to 3.75% appears highly likely now that the economy shrunk by 0.1% in October.<\/a><\/p>\n Ruth Gregory, deputy chief UK economist at Capital Economics, says:<\/p>\n The surprise 0.1% m\/m contraction in the economy in October was especially disappointing given the increase in manufacturing output, which rebounded after September\u2019s cyber-attack induced hit, and is a further reason to expect the Bank of England to cut interest rates next Thursday.<\/p>\n Suren Thiru, economics director at the ICAEW, says a pre-Christmas interest rate cut is \u201cnailed on\u201d:<\/p>\n \u201cThese figures confirm an off-colour October for the economy, with pre-Budget worries paralysing activity across key sectors, despite a boost to manufacturing from Jaguar Land Rover\u2019s return to production.<\/p>\n \u201cThis dismal outturn may have been followed by a similarly turbulent November with the damage to business and consumer confidence from the frenzied speculation ahead of the Budget likely to have frozen wider economic activity.<\/p>\n \u201cThe aftereffects from the Budget may mean that the UK\u2019s economic prospects are poorer over the near term, with the growing tax burden and a weakening jobs market likely to keep growth notably lower than the OBR expects.<\/p>\n \u201cWith these downbeat figures likely to further fuel fears among rate-setters over the health of the UK economy, a December policy loosening looks nailed on, particularly given the likely deflationary impact of the Budget.\u201d<\/p>\n TUC general secretary Paul Nowak urges the Bank of England to help families and businesses with a rate cut:<\/p>\n \u201cBringing our economy back on track after 14 years of Tory chaos was never going to be straightforward. A volatile international context is not making this job any easier.<\/p>\n \u201cAfter years of falling living standards, consumer spending is still very weak.<\/p>\n \u201cThe Government acted to boost household incomes at the Budget \u2013 it raised minimum wage, benefitting millions across the country, cut child poverty and funded energy payments to support living standards.<\/p>\n \u201cThe Bank of England should now recognise the impact that the living standards crisis has had on families\u2019 and businesses\u2019 finances and spending – and must deliver further cuts in interest rates next week\u201d<\/p>\n According to my LSEG screen, an interest rate cut is an 89% chance. Last month, the Bank split 5-4 when they voted to leave rates on hold, so it only needs one voter (likely governor Andrew Bailey) to switch sides\u2026.<\/p>\n Share<\/a><\/p>\n Updated at\u00a002.51 EST<\/p>\n Key events<\/p>\n Show key events only<\/p>\n Please turn on JavaScript to use this feature<\/p>\n Closing post<\/p>\n Time to wrap up\u2026<\/p>\n Economists are broadly expecting a cut to UK interest rates next week<\/a>, after Britain\u2019s economy shrank unexpectedly in October.<\/p>\n The economy contracted, for the second month running, as consumers held back on spending before Rachel Reeves\u2019s budget, and car manufacturing struggled to recover from the cyber-attack on Jaguar Land Rover<\/a>.<\/p>\n Figures from the Office for National Statistics (ONS)<\/a> showed gross domestic product fell by 0.1%, after a 0.1% drop in output in September. City economists had predicted a 0.1% rise in October.<\/p>\n After a fourth consecutive month without growth, economists said the latest snapshot would probably cement a Bank of England<\/a> interest rate cut next week amid fading inflationary pressures, fears over the sluggish outlook, and rising unemployment.<\/p>\n The money markets indicate there is a 90% chance that the Bank will cut rates by a quarter of a percentage point to 3.75% when it announces its latest decision on 18 December.<\/p>\n The service sector, and construction, both shrank in October, while production returned to growth.<\/p>\n A Treasury spokesperson said <\/a>the government was \u201cdetermined to defy the forecasts on growth\u201d\u2026<\/p>\n .. while shadow chancellor Sir Mel Stride blamed the government\u2019s \u2018mismanagement\u2019 of the economy<\/a>.<\/p>\n The ONS also reported that the UK\u2019s trade deficit widened in October<\/a>, due to a drop in exports.<\/p>\n Share<\/a><\/p>\n If the Bank of England cuts interest rates next week, from 4% to 3.75%, it would bring borrowing costs down to their lowest level since January 2023.<\/p>\n Interest rates started 2023 at 3.5%, before being hiked to 4% in February 2023 as the Bank battled inflation. They reached 5.25% that August, and stayed there for a year until the cutting cycle began in August 2024.<\/p>\n Share<\/a><\/p>\n The EY ITEM Club also expects the Bank of England to cut Bank Rate to 3.75% at its meeting next week.<\/p>\n However, they reckon it will be \u201canother close call\u201d, with a slim 5-4 majority expected in favour of a rate cut.<\/p>\n [Economists believe governor Andrew Bailey is the \u2018swing voter\u2019 who could decide the vote, with four of the Bank\u2019s nine policymakers like to vote for a cut again, after being thwarted in November].<\/p>\n Next Wednesday\u2019s inflation data could prove the final hurdle and may still sway the decision in either direction, EY ITEM Club say.<\/p>\n Matt Swannell, chief economic advisor to the EY ITEM Club, explains:<\/p>\n \u201cNovember\u2019s decision to keep Bank Rate unchanged was a finely balanced vote of 5-4 in favour, reflecting two different opinions amongst Committee members. These divisions will likely remain at the December meeting, but this time, the EY ITEM Club expects a finely balanced vote in favour of another cut, with inflation likely having fallen back in the last few months.\u201d<\/p>\n Share<\/a><\/p>\n Billionaire John Caudwell has claimed the \u201cbusiness unfriendly\u201d nature of the Government\u2019s first Budget, last year, was having an impact on growth<\/p>\n Caudwell, who switched allegiance from the Conservatives to back Labour before last year\u2019s election, told BBC Radio 4\u2019s World At One:<\/p>\n \u201cIt was wealthy people unfriendly, it\u2019s driven a lot of wealthy people out of the UK.<\/p>\n \u201cNow on top of that, we got the Employment Rights Bill coming in, which of course, we knew about in the manifesto, but I guess there was always a hope that it may not transpire, and that is going to make Britain less competitive.\u201d<\/p>\n Caudwell, who founded the Phones 4u chain, doesn\u2019t seem to have given up on Labour yet, saying:<\/p>\n \u201cI still support Labour because they\u2019re in power, they\u2019re going to stay in power, and we desperately need them to succeed, but they really need to change the tune of what they\u2019re doing.\u201d<\/p>\n Share<\/a><\/p>\n The UK\u2019s FTSE<\/a> 100 share index has slipped back from this morning\u2019s four-week high, and is now slightly in the red.<\/p>\n UK-focused companies are among the largest fallers, including hotel group Whitbread (-2%), supermarkets Tesco (-1.4%) and Sainsbury\u2019s (-1.1%) and retailer Next (-1.2%).<\/p>\n Share<\/a><\/p>\n The pound has slipped very slightly lower in the currency markets today, as traders digest the surprise fall in UK GDP in October.<\/p>\n Sterling has lost a tenth of a cent against the US dollar to $1.3376, but remains flat against the euro.<\/p>\n David Morrison, senior market analyst at Trade Nation, says:<\/p>\n UK GDP went negative again last month. This was yet another disappointing economic number for the UK, and one which now puts investors on recession watch. Sterling fell sharply on the news, before recovering around half of its losses. The poor data strengthens the probability of a rate cut from the Bank of England next week, even as high inflation remains a concern.<\/p>\n Share<\/a><\/p>\n Back in the financial markets, shares in Swiss bank UBS have hit a 17-year high, as investors grow confident that Swiss lawmakers will reach a compromise on proposals to impose tougher capital rules on the bank.<\/p>\n UBS\u2019s shares are up 3.4% today at CHF34.63, the highest since early 2008.<\/p>\n The Financial Times explains why:<\/a><\/p>\n The stock has been sensitive for months to debate over the Swiss government\u2019s June 2025 banking reform package, which could require UBS to hold up to $26bn in extra capital.<\/p>\n The bank has been particularly opposed to the proposal to force it to back its foreign subsidiaries with an extra $23bn in capital.<\/p>\n Investor sentiment has been boosted by local press reports of a compromise being proposed by multiple political parties. The multi-party proposal suggests broader political momentum behind a more moderate overhaul of the capital regime.<\/p>\n Share<\/a>Chart: UK GDP over the last two yearsA chart showing UK GDP over the last two years<\/a>Share<\/a><\/p>\n If the Bank of England is indeed about to cut interest rates several times, it could be a good time to be buying UK government debt.<\/p>\n Robert Timper, chief fixed income strategist at BCA Research, believes UK gilts will be the best-performing bond market in 2026, with the Bank of England most likely to surprise dovishly compared to other central banks, predicting:<\/p>\n \u201cUK gilts will go from second to the best-performing bond market, backed by a dovish BoE and reduced fiscal concerns.\u201d<\/p>\n Share<\/a><\/p>\n Morgan Stanley economist Bruna Skarica predicts UK interest rates will be cut next week, and again at the Bank of England\u2019s next meeting in early February.<\/p>\n Here\u2019s why:<\/p>\n GDP surprised to the downside in October, coming in below our-sub consensus forecast. Auto production bounced back, but auto sales reversed their September surge.<\/p>\n White-collar services sectors have lost steam into year-end. Construction activity is weak, suggesting rather clearly that rates are still very restrictive. The UK economy seems to need some support. The BoE is running out of reasons not to provide it. We expect cuts in December and February.<\/p>\n Share<\/a><\/p>\n Updated at\u00a006.12 EST<\/p>\n XTB: UK economy faces stagflation risks<\/p>\n The UK economy faces stagflation risks, warns Kathleen Brooks, research director at XTB, following October\u2019s economic contraction and the drop in UK exports.<\/p>\n Brooks says the disappointing UK GDP reading for October was \u201cthe dominant theme for markets this morning\u201d.<\/p>\n Growth declined by 0.1%, instead of rising by 0.1%, as economists had forecast. This means that the UK economy has not grown since June, and there could be worse to come. The ONS, who compiled the data, said that services showed no growth, while construction fell by 0.3% and production also slipped by 0.5%.<\/p>\n Meanwhile, the total trade deficit widened by \u00a34bn to \u00a36.7bn in the three months to October. Trade in services was in a surplus and has been mostly stable and in a mild uptrend this year, while the trade in goods has seen a widening of the deficit in recent months.<\/p>\n It is important to read the GDP data (see 7.01am onwards<\/a>) alongside the trade data (see 10.56am<\/a>).<\/p>\n Together, they suggest that the UK economy buys more while it produces less. If the Labour government wants to boost growth it needs to break this pattern. Without a doubt, exceptionally high energy prices compared to our peers is hurting how much we can produce and manufacture in the UK. Without significantly changing how the UK charges for energy, the UK economy is doomed to a subdued economic performance for the long term.<\/p>\n The UK economy is now facing \u201cthe spectre of stagflation, the worst of all worlds\u201d, she concludes.<\/p>\n Due to this, next week\u2019s CPI data will be crucial for the outlook for UK rates and could cause significant volatility in the pound and the Gilt market.<\/p>\n The announcement that Google Deep Mind will build its materials science lab in the UK (see yesterday\u2019s blog<\/a>) is undoubtedly good news, but it is not enough to deflect from the damage that the current economic policy direction is taking us in.<\/p>\n