BoE faces pressure to cut rates as economy shrinks

The Bank of England (BoE) is coming under mounting pressure to boost the ailing UK economy after fresh data revealed it suffered another contraction in October. The central bank’s Monetary Policy Committee (MPC) will meet and where economists are pencilling a 25 basis point reduction to interest rates taking the base level to 3.75 per cent.

Expectations of a cut follow the Office for National Statistics (ONS) revealing that the UK economy shrank 0.1 per cent in October. The contraction came as businesses paused on major investment plans amidst fears they would be targeted for a hefty tax raid as Chancellor Rachel Reeves looked to balance public finances in her last Budget.

Director of economic statistics at the ONS, Liz McKeown, said: “The economy contracted slightly in the latest three months as production fell again and services growth stalled".

“Within production there was continued weakness in car manufacturing, with the industry only making a slight recovery in October from the substantial fall in output seen in the previous month”.

The economy also contracted by 0.1 in September after a £1.9 billion cyber-attack on Jaguar Land Rover triggered a collapse in the manufacturing sector. The prospect of the UK economy shrinking over the last three months of the year is “now a possibility” after the grim GDP figures. The figures dealt another major blow to the Labour government’s sluggish growth mission.

Philip Shaw, chief economist at Investec, said the continued weakness in the economy will “put further pressure on the MPC to lower interest rates by a further 25 basis points at its final meeting of the year”.

The problems with the economy give rise to the feeling that the UK is not currently a place that consumers or businesses want to spend money. Analysts have pointed to the chaos on the road to the Labour government’s second Autumn Budget as hampering growth.

Head of Markets at Interactive Investor, Richard Hunter said: “The 0.1 per cent increase which had been expected was not helped by a high level of uncertainty around the Budget and its stultifying actions”.

Hunter added the economy was heading closer to a “technical recession” which could lead to the Bank being “forced to take action and ease interest rates more aggressively”.

Chief investment officer, Neil Birrell, at Premier Miton Investors, said: “The malaise that hung over the UK economy ahead of the budget is evidenced by October’s GDP numbers, when the economy shrank.

“It’s tough to see how this will reverse any time soon. The one hope is that there will be an interest rate cut and more to follow. It’s time to worry about recession, not inflation”.

Still, the upcoming decision is expected to be a close call between the MPC’s members. The latest reading for inflation sat at 3.6 per cent, falling slightly from 3.8 per cent though remaining well above the Bank’s two per cent target.

Ahead of the next rate decision, the ONS will publish the latest unemployment data followed by inflation. The Bank of England has estimated Chancellor Reeves’ Budget would strip up to 0.5 basis points off inflation for a year from April, mainly due to axing green levies from energy bills and the freeze on fuel duty.

But when appearing before the Treasury Committee last week, Clare Lombardelli, the deputy governor for Monetary Policy, said there were arguments to be made on whether rate-setters should “look through” the Budget measures and place greater weight on other factors.