December UK interest rate cut unlikely despite GDP slowdown [Video] #UKFinance

The UK’s economy neared stagnation in the third quarter of 2024 as GDP growth dropped to 0.1% in the three months to September, according to the Office for National Statistics (ONS).

This was worse than the 0.2% growth expected by analysts and marked a slowdown from the 0.5% growth recorded in the three months to June.

However, despite the weak GDP data, economists expect the Bank of England (BoE) to hold rates steady at its next review in December.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales (ICAEW), said: “Economic growth in the final quarter of this year is likely to be similarly modest with looming tax rises and growing global uncertainty likely to spark a renewed restraint to spend and invest, despite lower interest rates.

“In spite of these downbeat figures, a December policy loosening looks improbable as rate setters will likely be concerned enough over inflation risks from the budget and growing global headwinds to resist signing off back-to-back interest rate cuts.”

Read more: UK growth slows between July and September as services sector falters

According to the money markets this morning, there’s only a 17.5% chance of a UK interest rate cut in December, and an 82.5% chance the BoE leaves rates on hold.

The Bank of England kept interest rates at a 16-year high of 5.25% until August, when it cut them to 5%, followed by a further cut to 4.75% earlier this month.

Luke Bartholomew, deputy chief economist at abrdn, only expects further cuts in 2025. He said: “In any regard, the contents of the budget ended up somewhat boosting the growth and inflation picture for 2025, and so in that context these data will probably do little to change the thinking at the Bank of England. We continue to expect further gradual easing, with the next rate cut coming early next year.”

Despite the market consensus that Threadneedle Street is done with interest rate cuts for this year, Professor Costas Milas, of the University of Liverpool’s Management School, argued that the possibility should not be totally dismissed.

He said: “Today’s GDP reading is a worry, and more so the month-on-month drop by 0.1%. The MPC [monetary policy committee] of the BoE will decide again on interest rates on Thursday 19 December.

“By that time, the MPC will surely be aware of October’s GDP reading. If GDP in October drops again (following September’s drop), there is a good chance the MPC will cut rates. Think about this possible decision as “insurance policy” against the rising risk of recession also related to Donald Trump’s trade wars.”

Read more: UK economic growth is ‘not a good story,’ says Bank of England’s Bailey

Isaac Stell, investment manager at Wealth Club, added: “The UK economy looks to have lost some momentum during the third quarter of 2024, with a slowdown in growth from 0.5% in Q2 to 0.1% for Q3, whilst month-on-month GDP fell by 0.1% in September. The latest figures are likely to open the door to further rate cuts by the BoE before the year end.

Bank of England governor Andrew Bailey said a “gradual approach” is needed to reducing interest rates so the Bank’s MPC can assess various economic factors including the government’s plans on taxation.

Huw Pill, the BoE’s chief economist, this week indicated that further interest rate cuts are likely, while cautioning that inflationary pressures persist. Speaking at the UBS Conference, Pill – widely regarded as one of the more hawkish members of the MPC – struck a cautious tone.

Referring to the latest pay data, Pill said wage pressures remain “quite sticky”. Figures released this week revealed that regular pay growth fell to 4.8% in the three months to September, slightly above City forecasts.

Pill said that the current levels of pay growth were “hard to reconcile” with the BoE’s inflation target of 2% given the state of productivity growth in the UK. He also noted the challenges posed by inflation in the services sector, saying that prices remain “stuck at a higher rate of inflation than we see in other jurisdictions.”

Despite these concerns, Pill suggested that the BoE would still likely begin to “gradually dial back monetary restrictiveness” over the coming months, signalling further rate cuts.

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