Analysts say the slowdown in the UK economy makes it “unlikely” that the Bank of England will cut interest rates next week.
Earlier this week, figures from the UK Office for National Statistics (ONS) revealed that gross domestic product (GDP) grew by zero percent in April.
It is a blow to Chancellor Rishi Sunak’s claim that the country’s economy has recovered since falling into a “technical recession” late last year.
A country is considered to be in recession if it experiences negative economic growth for two consecutive quarters, a situation the UK economy is in during the final months of 2023.
The ONS has reported in recent months that the UK economy will grow by 0.6% in the first quarter of 2024.
However, the latest GDP figures suggest that further progress is needed, which could influence the Bank of England’s interest rate decision-making.
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Latest GDP figures a blow for Chancellor Rishi Sunak
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Over the past two years, the central bank has been increasing the country’s base interest rate as part of efforts to ease inflation in the UK.
The interest rate is currently at 5.25% and has remained at this level since August 2023.
This was beneficial for savers, but for mortgage holders and other debt borrowers, repayments skyrocketed during this period.
With the consumer price index (CPI) falling to 2.3 percent, analysts expect the bank to cut interest rates sooner or later.
Despite this, the latest GDP figures suggest that Britons may have to wait several more months for interest rates to be cut.
Lindsay James, investment strategist at Quilter Investors, warned the public not to expect any sudden changes in the Bank of England’s investment strategy next week.
He explained: “The terrible weather today is down to the fantastic British weather. GDP The figures were weak as persistent rains curbed consumer spending, stalling economic growth and recording no growth.
“With April having fallen 55 per cent above normal and the wettest April since 2012, it is no wonder the economy is struggling, with sectors like retail, construction and pubs severely affected.”
“Fortunately, the weather has improved recently, which is likely to boost May’s numbers, but the second quarter is off to a slow start and there is a lot of catching up to do to match the first quarter’s 0.6% growth.”
“However, despite this new economic slowdown, it is unlikely to be enough to prompt the Bank of England to cut interest rates next week. Wage inflation remains high and consumer price inflation is expected to rise further in the coming months, so the Bank of England will likely not want to deviate from its strategy for now.”
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“During the election campaign, both Labour and the Conservative parties put forward proposals to boost economic growth in an extremely tough fiscal environment.
“Given the tight fiscal situation, any significant growth is unlikely to come without significant additional borrowing, something neither party nor the bond market particularly wants.”
“With the outcome looking increasingly like a foregone conclusion, Labor is hoping its plans for ‘green’ jobs and infrastructure investment will help steer the economy out of the current slump, but without the necessary fiscal breathing space it is likely to face an uphill battle.”
The Bank of England’s Monetary Policy Committee (MPC) is next due to make an announcement on interest rates on 20 June 2024.