UK Retail Sales Falls 0.3% in December, GBP/USD Slides on BoE Rate Cut Bets

UK Retail Sales Slide, Boosting BoE Rate Cut Bets

UK consumers gave the Bank of England (BoE) potential relief on Friday, January 17, as persistent inflationary pressures met with signs of waning consumer spending. Here’s what the data reveals its potential impact on the pound.

December Retail Sales: Weak Consumer Spending Weighs on Inflation

The UK Retail Sales Report drew significant interest amid shifting sentiment toward a February BoE rate cut.

Retail sales unexpectedly declined by 0.3% in December, reversing a modest 0.1% gain in November. Economists anticipated a 0.4% increase. Consumers tightened their purse strings amid labor market uncertainty and the elevated inflation environment.

According to the Office for National Statistics,

• Non-store retailing and food store sales declined by 1.9% and 1.9%, respectively.
• However, Textile Clothing & Footwear Store sales had the largest contribution, surging by 4.4%, while Department Store sales increased by 1.2% in December.
• Retailers attributed rising Department Store and Household Goods sales to stronger Christmas sales.
• Automotive fuel sales rose 1.6%.
• Retail sales volumes declined by 0.8% quarter-on-quarter in Q4 2024 but were 1.9% higher compared with Q4 2023.

Will the Bank of England Cut Rates in February?

The pullback in retail sales could dampen demand-driven inflation, boosting expectations of a February BoE rate cut. Notably, the BoE kept rates at 4.75% in December, citing ongoing inflation concerns.

However, signs of cooling inflation have emerged. The UK annual inflation rate eased from 2.6% in November to 2.5% in December, with the core inflation rate dropping to 3.2%. Softer inflation has fueled bets on a February rate cut, with the UK economy also underperforming. In November, the economy expanded by 0.1%, below a 0.2% consensus.

Today’s retail sales further reinforce expectations of a more dovish BoE rate path. According to a January Reuters poll, all surveyed economists expect a 25 basis point February rate cut. 60% of economists predict the BoE will cut rates four times in 2025.

GBP/USD Reacts to the UK Retail Sales Report

The pound responded swiftly to the disappointing retail sales data. Ahead of the UK retail sales data release, the GBP/USD briefly climbed to a pre-report high of $1.22439 before falling to a low of $1.22054.

Following the UK retail sales data release, the GBP/USD tumbled from $1.22157 to a low of $1.21755.

On Friday, January 17, the GBP/USD was down 0.45% to $1.21805. The response underscored the significance of the retail sales fall on inflation and the BoE rate path.

Experts Insights

Bank of England Deputy Governor Sarah Breeden recently changed her stance on monetary policy, supporting rate cuts. She stated:

“The recent evidence further supports the case to withdraw policy restrictiveness and I expect to continue to remove restrictiveness gradually over time. To be clear, I expect Bank Rate to come down over time as the effects of the large shocks of the past continue to abate.”

Today’s figures align with the Deputy Governor’s outlook, emphasizing a gradual shift toward policy easing as inflation moderates. While the outlook remains challenging, the prospect of a more dovish BoE could alleviate pressures on UK households, particularly as inflation moderates.