Recession fuels calls for interest rate cuts

Investors are betting on three interest rate cuts in the UK this year after the economy tipped into recession.

At the end of a week of crucial economic data, the Bank of england is now expected to lower headline borrowing costs from 5.25pc to 4.5pc by Christmas.

The timing of the first move remains uncertain, with bets on financial markets suggesting a 20pc chance it will come in May, 60pc in June and 80pc in August.

The pound fell to $1.2591 and €1.1696, while gilt yields dipped on the bond markets as investors ramped up bets on rate cuts.

Thomas Pugh, UK economist at consultant RSM UK, said: ‘A recession gives the Bank more cover to pivot towards cutting interest rates as early as the spring.’

Megan Greene, who sits on the Bank of England’s rate- setting monetary policy committee (MPC), said she needs to see more evidence that inflation is returning to target before voting for rate cuts.

The economist, who until this month was voting to raise rates, said they will need to ‘remain restrictive for some time for inflation to sustainably return’ to 2pc.

Expectations are likely to shift again, however, after wild swings this week as investors grappled with a flurry of official figures.

On tuesday, the office for national statistics (ons) revealed that wages are rising at a faster-than-anticipated 6.2pc yearon-year, fuelling fears that pay growth is too strong for the Bank of england to cut interest rates soon. And data in the United states showed inflation in the world’s biggest economy running ‘hot’ at 3.1pc – dashing hopes of an early rate cut by the Federal reserve.

However, a UK rate cut this spring or early summer seemed possible again on Wednesday when the ons said that inflation had held firm at 4pc in January – bucking expectations of a rise.

And pressure mounted on the Bank yesterday after the ons said the economy shrank by 0.3pc in the final three months of 2023, meaning that the UK is in recession following a contraction of 0.1pc in the previous quarter.

The figures will be pored over by the MPC as it weighs up when and if rate cuts are appropriate.

Julian Jessop, economics fellow at the Institute of economic Affairs, said: ‘the MPC’s job is to worry about inflation, not growth, but the case for early rate cuts is now even stronger.’

And nicholas Hyett, an investment analyst at Wealth Club, said: ‘With inflation lower than expected this week, the news that the UK is in recession will lead to growing pressure for the Bank of england to cut interest rates.

‘But while recession is clearly bad news for the UK economy, it’s worth bearing in mind that, as recessions go, this is still a very mild one and might yet get revised out of existence altogether.

‘Whether today’s recession transforms into something that’s remembered outside the pages of an economic history textbook remains to be seen.’