Interest rates to plunge in 2024 after GDP falls, City markets suggest

Interest rates

City markets today priced in a full percentage point cut in interest rates by the end of next year after storms and strikes laid waste to economic growth in October.

GDP fell 0.3% in the month, according to latest figures from the Office for National Statistics (ONS), compared with a City consensus forecast of flat output in the month.

All three major sectors of the economy — services, production and construction — were in reverse gear, encouraging traders to bet that the Bank of England will order rate cuts sooner than previously expected to stave off recession.

Although the Bank of England is almost universally expected to leave rates on hold at 5.25% tomorrow, market pricing is now pointing to a first cut as soon as May — far earlier than most economists had been predicting — with a full point reduction to 4.25% possible by December.

The increasingly doveish expectations come just days after the CBI predicted there would be no cuts before 2026.

Falls in the cost of money would ease the pressure on families and businesses struggling under the burden of two years of punishing interest rate rises, which started almost exactly two years ago.

Today’s bleak GDP data suggest that the economy has been more badly damaged than previously feared by the monetary tightening, with recession fears now making a reappearance.

However, economists and forecasters also pointed to one-off factors in October that could have deepened the downturn.

The month saw a prolonged spell of wet and windy weather including Storm Babet which brought disruption to much of the country and is likely to have harmed retail demand and construction activity.

There was also evidence that the knock-on effect of the Hollywood strikes might have damaged Britain’s huge film and TV production sector. The motion picture, video and TV production sub-sector saw one of the biggest falls in output during the month, according to the ONS.

Danni Hewson, head of financial analysis at broker AJ Bell, said: “Awful weather and the disruption caused by strikes won’t have helped, but even with the continued squeeze on consumer spending, the contraction in economic growth recorded in October was greater than had been expected.

“All sectors of the economy were affected as the impact of two years of interest rate hikes work their way through the system. The big question is whether October is the harbinger of recession or a tipping point as wage growth finally surpasses inflation?

“No one expects the Bank of England to do anything other than hold firm on rates as it continues the fight to bring inflation back down to that elusive 2% target. But the economy is weakened, treading water until such a time as those rate hikes can start to be unravelled.”

Matthew Ryan, head of market strategy at financial services firm Ebury, said: “We still expect the BoE to push back against market expectations for interest rate cuts this week, which continue to appear excessive. The recent misses in UK inflation and GDP data do, however, suggest that the bank may somewhat water down its communications on interest rates, possibly by tweaking its guidance that further tightening is possible.

“We would also not be overly surprised to see a doveish shift in the bank’s voting pattern, where one or more of the hawks change their vote in favour of no change, and/or one of the doves opts for an immediate cut.”

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