A summer interest rate cut ‘looks inevitable’ after official figures yesterday revealed the economy shrank for a second month in a row.
The Office for National Statistics (ONS) said gross domestic product (GDP) contracted by 0.1 per cent in May following a fall of 0.3 per cent in April.
Experts said that, combined with signs of a deteriorating jobs market, it would add further pressure on the Bank of England to cut interest rates at its next meeting – despite inflation remaining stubbornly high at more than 3 per cent.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales (ICAEW), said the downbeat GDP figures ‘increase anxiety over the health of the UK economy’.
He added: ‘The lack of momentum in the UK economy indicated by these sluggish figures means that an August interest rate cut looks inevitable, despite the recent spike in inflation.’
Markets yesterday signalled a near-80 per cent chance of a cut from 4.25 per cent to 4 per cent at the next meeting, with a further cut to 3.75 per cent also pencilled in by the end of the year. That would provide a boost for millions of borrowers.
Looking ahead: Bank officials, led by governor Andrew Bailey, have signalled a ‘gradual and careful’ approach to rate cuts
Bank officials, led by governor Andrew Bailey, have signalled a ‘gradual and careful’ approach to rate cuts but he has acknowledged signs that the job market is weakening.
Recent figures showed that more than 100,000 jobs were lost in May alone. James Smith, UK economist at ING Bank, said: ‘Until now, officials have appeared highly reluctant to move beyond their recent, gradual once-per-quarter cutting pace.
‘In part, that is because the Bank assesses employment growth to be virtually flat. The latest data suggests that’s an increasingly optimistic view of the jobs market.’
The pound fell by nearly a cent to below $1.35 versus the US dollar following the GDP figures and was lower against the euro.
Chancellor Rachel Reeves admitted that the figures were ‘disappointing’.
Matthew Ryan, of global financial services firm Ebury, said: ‘Britain may be heading for recession far sooner than markets had anticipated. It will now take something quite special for the UK to avoid an outright contraction in GDP in Q2.’
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