UK Retail Sales Drops by 0.7% in October Sparking Rate Cut Debate

UK Retail Sales Dips in October Amid Rate Cut Speculation

Will the retail sales figures boost bets on a December BoE rate cut? On Friday, November 22, the UK Retail Sales Report drew interest amid falling bets on a December Bank of England rate cut.

Retail sales declined by 0.7% in October, following a 0.1% increase in September. Retailers continued to grapple with elevated inflation and interest rates, impacting consumption. The weak monthly figure highlighted a cooling in consumer spending, with year-on-year numbers also signaling softer demand-driven inflation.

According to the Office for National Statistics,

• Non-food store sales declined by 1.4% in October (September: +2.3%).
• Clothing stores saw sales tumble by 3.1% in October.
• Food store sales dropped by 0.6%.
• Automotive fuel and household goods store sales increased by 0.6% and 0.1%, respectively.
• Retail sales volumes increased by 0.8% in the three months to October 2024, compared to the three months to July 2024.

Retailers attributed weak retail sales to uncertainty surrounding the UK budget.

Bank of England Monetary Policy: A Delicate Balancing Act

The pullback in retail sales could dampen demand-driven inflation, potentially boosting bets on a Q1 2025 BoE rate cut.

However, the BoE may adopt a cautious approach in the near term following November’s UK inflation Report. The BoE will likely need to observe inflation softening over consecutive months before considering a rate cut.

The annual inflation rate accelerated from 1.7% in September to 2.3% in October, exceeding the BoE’s 2% target. While the BoE will likely monitor consecutive months of inflation moderation before cutting rates, the data highlights the BoE’s challenge of curbing inflation sustainably.

Experts Weigh In on BoE Inflation Challenge

Blokland Smart Multi-Asset Fund founder Jeroen Blokland remarked on the UK Inflation Report, saying,

“Inflation is rising again in the UK! This is another country showing at least a temporal hick-up in getting inflation back to target. Like in most of these countries, inflation has not hit the central bank target for well over three years.”

Notably, the Bank of England will likely remain focused on inflation, while retail sales trends could provide insights into broader economic conditions.

GBP/USD Reaction to the UK Retail Sales Report

Ahead of the UK retail sales data release, the GBP/USD climbed to a pre-report high of $1.25940 before falling to a low of $1.25644.

Following the UK retail sales data release, the GBP/USD dropped from 1.25702 to a low of $1.25510.

On Friday, November 22, the GBP/USD was down 0.26% to $1.25563.

Up Next

Later in the session on Friday, UK private sector PMIs will also influence sentiment toward the BoE rate path. Economists expect the crucial S&P Global Services PMI to hold at 52.0 in November. An unexpected decline in the headline PMI and softer prices could draw the BoE’s interest.

The services sector contributes significantly to inflation, affecting the BoE rate path. Services inflation rose from 4.9% in September to 5.0% in October.