- GDP is shrinking again, but analysts say the bank is more concerned about inflation
The pound fell from recent highs on Friday after new data showed the economy shrank for the second month in a row.
Data from the Office for National Statistics showed a 0.1 percent decline in GDP for October, lower than expectations of 0.1 percent growth and following a 0.1 percent decline the month before.
Sterling fell as much as 0.4 percent against the dollar in the wake of the announcement, before recovering to trade 0.2 percent lower at $1.26 by midday, having risen about 1 percent since late November.
The decline reflected higher expectations among investors about the pace and size of the Bank of England’s key rate cuts.
Rob Morgan, chief investment analyst at Charles Stanley, said: ‘Today’s weak figure marginally increases the likelihood of a further rate cut at the Bank of England’s December meeting next week.’
However, he added that the bank’s monetary policy committee is likely to opt for a pause as policy makers’ attention is consumed by inflation.
Governor Andrew Bailey is likely more focused on inflation than growth, analysts say
While bets on a rate cut increased on Friday, market prices still suggest investors expect the BoE to delay 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 another cut at the December meeting.
‘With persistently high wage growth, high CPI inflation in the services sector and uncertainty over how much of the increase in employers’ national insurance contributions (NIC) will be passed on in the form of higher prices, this keeps Monetary Policy members Committee (MPC) within limits. wait and see mode.’
The CPI came in at an unexpectedly high 2.3 percent for the 12 months to October, compared with 1.7 percent the month before, while core inflation rose to 3.3 percent.
BoE Governor Andrew Bailey has repeatedly expressed concern about the potential for a resurgence in inflation. New CPI data for November will be released next week.
Thomas Pugh, economist at RSM UK, said: ‘There are also a range of risks on the horizon that could significantly increase inflation.
‘The geopolitical situation in the Middle East and Russia is clearly unstable; it is unclear how much of the increase in costs the budget firms will attempt to pass on; and new economic policies in the US could increase inflation in Britain, either through the impact of tariffs or through a stronger dollar.
“Ultimately, the MPC will likely decide that the risk of inflation rising again and becoming entrenched is greater than the risk of the economy 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 the current level of 4.75 percent, while AXA IM’s Dickens thinks it will stop at 3.75 percent.
Dickens said: ‘We think the risks to the ‘gradual’ pace of cuts recently set out by policymakers are increasingly tilted to the downside.
‘While a rebound in government consumption will boost growth next year, the fact that interest rates remain in restrictive territory will limit a recovery in household spending at a time of increasing global uncertainty.
‘We will see four cuts next year – one per quarter’
Expectations about the pace and size of the BoE’s interest rate cuts have retreated as economic data deteriorated
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