A cut in interest rates this week seems nailed on, amid talk that it could be bigger than the quarter point expected.
The Bank of England is expected to reduce borrowing charges from 4% to 3.75%, with some suggesting a 0.5% cut is not out of the question in view of the deteriorating economy.
Growth fell 0.1% in October when a 0.1% rise was forecast and there is talk of a recession in 2026.
A bigger rate cut would bring the UK closer to rates elsewhere. It is 2% in the eurozone and 2.25% in Canada, though the US is broadly in line with the UK with a 3.5-3.75% range.
A cut will offer some cheer to businesses and homebuyers but with more weak jobs data also due this week, sterling will remain under pressure.
The pound’s winning streak against the dollar came to an abrupt end following the release of the economic data. The sterling to dollar exchange rate dropped from $1.1396 to $1.1380. Against the euro the pound fell from €1.1410 to €1.1390.
This will hurt holiday makers heading to Europe over the Christmas break and raise Britain’s energy-buying costs.
Samuel Mather-Holgate, managing director at wealth manger Mather and Murray Financial, said: “I believe markets are underestimating the possibility of a 0.5% mega-cut in the base rate, as the Bank of England, for once, seeks to get ahead of the curve.”
The majority view is that rate setters will resist a larger cut because of the persistent inflationary pressures. Data on inflation will be published on Wednesday, a day before the Bank’s announcement.
Chartered Financial Planner Anita Wright at Ribble Wealth Management, believes a”0.5% cut is not out of the question”, stating that “the key point is that policy will now be set with an eye to warding off recession first and worrying about inflation second.”
DIARY
Monday 15 December
- Rightmove UK house price survey
Tuesday 16 December
- Full year figures from WH Smith
- Trading statement from SThree
- UK unemployment, job vacancies and wage growth
- Flash purchasing managers’ indices for manufacturing and services industries
Wednesday 17 December
Thursday 18 December
- Half-year figures from Currys
- Bank of England decision on interest rates
- US inflation
Friday 19 December
- UK retail sales
- UK government borrowing figures
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