‘Time to worry about recession’ – Bank faces pressure to cut rates as economy shrinks
The Bank of England is coming under mounting pressure to give a shot in the arm to the ailing UK economy after fresh data revealed it suffered another contraction in October.
The central bank’s Monetary Policy Committee (MPC) will meet next Thursday where economists are pencilling a 25 basis point reduction to interest rates taking the base level to 3.75 per cent.
Expectations of a cut follow the Office for National Statistics (ONS) revealing on Friday that the UK economy shrank 0.1 per cent in October. The contraction came as businesses hit pause on major investment plans amid fears they would be targeted for a hefty tax raid as Chancellor Rachel Reeves looked to balance public finances in her Autumn Budget.
The figures dealt another major blow to the Labour government’s sluggish growth mission.
In September, the economy contracted 0.1 per cent after manufacturing output was hammered by Jaguar Land Rover hitting pause on production following its £1.9bn cyber attack.
Philip Shaw, chief economist at Investec, said the continued weakness in the economy will “put further pressure on the MPC to lower interest rates by a further 25 basis points at its final meeting of the year next week.”
‘The UK is not currently a place that consumers or businesses want to spend money’
Analysts have pointed to the chaos on the road to the Labour government’s second Autumn Budget as hampering growth.
Richard Hunter, head of markets at interactive investor, said: “The 0.1 per cent increase which had been expected simply did not materialise and was not helped by a high level of uncertainty around the Budget and its stultifying actions.”
Hunter added the economy was heading closer to a “technical recession” which could lead to the Bank being “forced to take action and ease interest rates more aggressively”.
Neil Birrell, chief investment officer at Premier Miton Investors, said: “The malaise that hung over the UK economy ahead of the budget is evidenced by October’s GDP numbers, when the economy shrank….
“The UK is not currently a place that consumers or businesses want to spend money. It’s tough to see how this will reverse any time soon. The one hope is that there will be an interest rate cut next week and more to follow. It’s time to worry about recession, not inflation”
Still, the upcoming decision is expected to be a close call between the MPC’s hawks and doves.
The latest reading for inflation sat at 3.6 per cent, falling slightly from 3.8 per cent though remaining well above the Bank’s two per cent target.
Ahead of the next rate decision, on Tuesday the ONS will publish the latest unemployment data followed by inflation on Wednesday.
The Bank of England has estimated Reeves’ Budget would strip up to 0.5 basis points off inflation for a year from April, mainly due to axing green levies from energy bills and the freeze on fuel duty.
But when appearing before the Treasury Committee last week, Bank hawk Clare Lombardelli, the deputy governor for Monetary Policy, said there were arguments to be made on whether rate-setters should “look through” the Budget measures and place greater weight on other factors.