Traders predict UK interest rates could fall to 4.25% by December 2024
City investors are now pricing in around four quarter-point cuts to UK interest rates from the Bank of England next year, as they digest the drop in GDP in October.
The money markets are currently indicating that UK interest rates will have fallen to around 4.25% by December 2024, down from 5.25% today.
The first cut is expected as early as May next year (to 5%), with further reductions being pencilled in for the second half of 2024.
If the UK does slide into a mild recession, as some economists are warning, then there would be serious pressure on the BoE to cut rates.
But the Bank might push back against these rate cut expectations tomorrow, when it sets UK borrowing costs for the last time this year.
Matthew Ryan, head of market strategy at global financial services firm Ebury, says:
“We expect the Bank of England to hold rates steady for the third straight meeting on Thursday, with the MPC to once again stress that it is too soon to even think about the possibility of policy easing.
We think that markets are getting carried away with the extent of policy easing that will be required in 2024.
Six of the Bank’s policymkakers are expected to vote to leave interest rates on hold tomorrow, outvoting three who are tipped to push for a rise to 5.5%.
Key events
Bloomberg says that traders “ramped up bets on interest-rate cuts” by the Bank of England next year after today’s October GDP report (as we covered in the earlier post).
The soft GDP data reinforced the view that policymakers won’t be able to keep monetary policy tight for so long.
Bloomberg adds:
Markets priced 97 basis points of easing in 2024, the most in the current cycle. That means three quarter-point cuts are fully baked in and there’s an 85% chance of a fourth — an outcome that would take borrowing costs to 4.25%.
Full story: UK economy shrinks unexpectedly as households feel squeeze
Richard Partington
Britain’s economy shrank unexpectedly by 0.3% in October as households and businesses came under growing pressure amid the cost of living crisis, raising the chances of a recession.
The Office for National Statistics said that gross domestic product (GDP) fell on the month, after growth of 0.2% in September, with contractions across all main sectors of the economy. City economists had forecast zero growth.
The UK’s dominant services sector was the biggest driver of the fall in output, with declines in IT, legal firms and film production. These were compounded by widespread falls in manufacturing and construction after poor weather led to a drop in activity.
Paul Dales, the chief UK economist at the consultancy Capital Economics, said the figure “suggests that the economy may go nowhere again in the fourth quarter, or perhaps is in the mildest of mild recessions”.
More here.
Traders predict UK interest rates could fall to 4.25% by December 2024
City investors are now pricing in around four quarter-point cuts to UK interest rates from the Bank of England next year, as they digest the drop in GDP in October.
The money markets are currently indicating that UK interest rates will have fallen to around 4.25% by December 2024, down from 5.25% today.
The first cut is expected as early as May next year (to 5%), with further reductions being pencilled in for the second half of 2024.
If the UK does slide into a mild recession, as some economists are warning, then there would be serious pressure on the BoE to cut rates.
But the Bank might push back against these rate cut expectations tomorrow, when it sets UK borrowing costs for the last time this year.
Matthew Ryan, head of market strategy at global financial services firm Ebury, says:
“We expect the Bank of England to hold rates steady for the third straight meeting on Thursday, with the MPC to once again stress that it is too soon to even think about the possibility of policy easing.
We think that markets are getting carried away with the extent of policy easing that will be required in 2024.
Six of the Bank’s policymkakers are expected to vote to leave interest rates on hold tomorrow, outvoting three who are tipped to push for a rise to 5.5%.
The 0.5% drop in output in the UK construction sector was driven by a fall in new building projects.
Private housing new work (ie: building homes) shrank by 5.2%, as house builders cut back due to weaker demand, while there was a 1.2% drop in private commercial new work.
In the August-October quarter, construction output is estimated to have fallen by 0.3%.
October was a difficult month for UK manufacturers.
UK production output is estimated to have fallen by 0.8% in October, driven by “widespread declines in manufacturing output”, the ONS says.
That follows no growth in September and a fall of 0.5% in August.
Here’s a handy breakdown of the GDP report, from Sky News’s Ed Conway:
Hunt: inevitable GDP will be subdued whilst interest rates fight inflation
Jeremy Hunt has blamed high interest rates for the UK economy shrinking in October.
The chancellor says:
“It is inevitable GDP will be subdued whilst interest rates are doing their job to bring down inflation.
“But the big reductions in business taxation announced in the autumn statement mean the economy is now well placed to start growing again.”
Goldman Sachs and JP Morgan cut UK’s 2023 growth forecast
Two Wall Street titans have lowered their forecasts for UK economy growth this year, following October’s unexpected contraction of 0.3%.
Goldman Sachs and J.P.Morgan have both cut their forecast for Britain’s annual economic growth to 0.5%, down from 0.6% before, Reuters reports, adding:
For 2024, Goldman Sachs expects the economy to expand by 0.6%, down from previous outlook of 0.7%, while J.P.Morgan cut the growth forecast to 0.2% from 0.4%.
As well as the Hollywood strikes, Britain’s TV and movie sector has also been hit by a slump in commissions from homegrown broadcasters.
Those broadcasters have been hit by a fall in advertising spending, which depletes their budgets, and are also ploughing through a glut of content completed after the pandemic.
We reported in September that observers were asking whether the UK broadcasting industry is facing a temporary post-pandemic reset or an existential crisis, as production slumped….
… and followed up in November with a warning that the industry could suffer a brain drain of skilled talent, as film and TV makers were pushed into other jobs.
This will have contributed to the drop in output in the “motion picture, video and TV production” part of the services economy (see earlier post) in October.
The strikes held by Hollywood’s actors and writers earlier this year are one factor which hit the TV industry in October, points out Investec.
The strikes, which were resolved by early November, curtailed production of some new movies.
Investec say:
Given the dominance of the service sector, its output fall alone accounted for more than half of the decline in total GDP. Within it, the sub-sector that made the largest negative contribution to GDP growth was the information and communications industry, which the ONS in turn attributed primarily to falling value added in consumer programming, consultancy and related activities on the one hand and in motion picture, video and TV production on the other. We wonder whether there were some knock-on effects on the latter from the Hollywood strikes that affected the pipeline of production. Still, that is by no means the entire story.
Consumer-facing services, the laggard in the post-pandemic recovery, have seen value added shrink for four consecutive months now and are yet to regain their pre-pandemic level.
Wet weather in October was another factor, they add:
Indeed, it was ‘the equal-sixth wettest October on record for the UK in a series from 1836’, as per the Met Office, accompanied by strong winds. This is said to have negatively affected construction, retail, pubs and tourism.
But again this is at best a partial explanation: most of the fall in industrial production for instance reflected a hefty drop in manufacturing output (down 1.1% on the month), where weather effects should have played no role. And although new work within construction fell by 1.7%, repair and maintenance posted a rise of 1.3%, despite the weather conditions.
October’s drop in GDP isn’t expected to jolt the Bank of England into a shock interest rate cut tomorrow.
The City reckon the BoE is certain to leave rates on hold at 5.25% – it’s a 99.9% probability, according to money market pricing.
Charles Hepworth, Investment Director at GAM Investments, says the Bank will be focused on inflation (which was still double its target in October, at 4.6%):
“A bigger drop in activity for the UK economy was seen this morning with GDP for the month of October registering a 0.3% drop on the month, more than the 0.1% drop expected by economists. Industrial production dropped 0.8% against expectations of a 0.1% drop while manufacturing fell more by 1.1% when it was expected to remain flat. This means in the three months to October, overall output was zero, not what the Chancellor was hoping for.
While this doesn’t signify a recession is here, it does raise questions of whether it isn’t far off and this stagnant picture of the UK economic performance will keep up the pressure on the Bank of England to begin to cut rates next year. Tomorrow, we have the Bank’s interest rate decision but don’t expect any change right now from the Bank, with inflation pressures outweighing any downturn pressure.”
Capital Economics: Economy may be in the mildest of mild recessions.
Capital Economics, the City consultancy, warn that the UK may be in “the mildest of mild recessions”.
Their chief UK economist, Paul Dales, told clients this morning:
The 0.3% m/m fall in real GDP in October (consensus 0.0%, Capital Economics forecast: -0.2%) suggests that the economy may go nowhere again in Q4 or perhaps is in the mildest of mild recessions.
That may nudge the Bank of England a little close to cutting interest rates, although when leaving rates at 5.25% tomorrow the Bank will probably push back against the idea of near-term rate cuts.
The weakness in October was not due to widespread strikes as there were fewer working days lost to strikes in September than in October (131,000 versus 231,000), but it may partly be due to the unusually wet weather.
That said, the weakness was broad based, which indicates that the ongoing drag from higher interest rates is more than offsetting any boost from the rise in real wages.
Recession indicators “flashing red” after GDP report
October’s fall in GDP means the spectre of recession will hover over the UK economy this winter.
Thomas Pugh, economist at audit, tax and consulting firm RSM UK, says
‘The 0.3% m/m contraction in GDP in October, coming on the back of flatlining growth in Q3, has our recession warning indicators flashing red. However, growth should pick up over the rest of the quarter as a sharp fall in inflation, strong wage growth and government transfers to low-income households all give consumer spending a boost. As a result, we expect Q4 to look more like a repeat of Q3 than the start of a recession.
‘In any case, the big picture is still one of a stagnating economy. We doubt growth will materially pick up until towards the end of next year, meaning that the spectre of recession will hang over the UK economy for a long time yet.
Rob Morgan, chief investment analyst at Charles Stanley Direct, says the UK economy continues to teeter on the edge of recession, adding:
Having eked out some marginal growth in the first and second quarters of 2023, and flatlining in the third, the UK economy contracted by 0.3% in October as higher interest rates weighed on activity.
Particularly wet weather during the month was cited as a negative factor, but that doesn’t change the bigger picture of an economy flatling with risk to the downside. This contraction could herald the start of a mild recession, and at the very least it shows the economic resilience shown earlier in the year is wearing off in the face of rising inflation and borrowing costs.