UK Retail Sales Surge 2.9% in May, BoE Rate Cut in August Less Likely

May UK Retail Sales Rebound: Will BoE Cut Rates in August?

On Friday, June 21, UK retail sales data tested investor bets on an August Bank of England interest rate cut.

UK retail sales surged 2.9% in May after tumbling 2.3% in April. Economists expected retail sales to advance by 1.5%.

Furthermore, UK retail sales ex-fuel increased by 2.9% in May after falling by 2.0% in April. Economists predicted UK retail sales ex-fuel to rise by 1.3%.

According to the Office for National Statistics,

• Non-food store sales jumped by 3.5% in May 2024, the most marked increase since April 2021.
• Automotive fuel sales increased by 2.8%.
• Department store sales rose by 1.7%.
• Food store sales volumes were 1.2% higher in April.
• Non-store retailing advanced by 5.9%, the most marked increase since April 2022.

Retail sales volumes increased by 1.0% in the three months to May compared to the previous three months.

Retailers attributed the rebound in retail sales to improved weather conditions, increased foot traffic, and promotions.

Bank of England Monetary Policy Implications

Retail sales increased in May, with consumer spending reversing the April slump.

The upward trend in year-on-year retail sales could affect expectations of an August Bank of England interest rate cut. Higher consumer spending could fuel demand-driven inflation and support a more hawkish BoE rate path.

On Thursday, June 20, the Bank of England held interest rates at 5.25%. Bank of England Governor Andrew Bailey said,

“It’s good news that inflation has returned to our 2% target. We need to be sure that inflation will stay low, and that’s why we’ve decided to hold rates at 5.25% for now.”

FX Empire author and senior editorial team member James Hyerczyk reacted to the BoE monetary policy decision, saying,

“The policy minutes revealed that the decision to hold rates was “finely balanced” for some MPC members, who noted moderating but still high wage growth and services inflation since May.”

Nevertheless, the next round of UK inflation and labor market data could impact sentiment toward an August or September BoE rate cut. Steady wage growth and sticky inflation may delay the timing of a BoE rate cut to November.

GBP/USD Reaction to the UK Retail Sales Numbers

Before the UK retail sales data, the GBP/USD fell to a low of $1.26506 before climbing to a high of $1.26654.

However, in response to the retail sales report, the GBP/USD fell to a low of $1.26613 before striking a high of $1.26738.

On Friday, June 21, the GBP/USD was up 0.09% to $1.26686.

Up Next

Later in the session on Friday, UK private sector PMI numbers could affect investor expectations of an August BoE rate cut.

The UK S&P Global Services PMI will likely influence the BoE rate path more, accounting for over 70% of the UK economy. Furthermore, the services sector continues to contribute to headline inflation.

Economists forecast the UK S&P Global Services PMI to increase from 52.9 to 53.0 in June. Hotter-than-expected numbers could affect investor expectations of a Q3 2024 BoE rate cut.

Investors should also consider the sub-components, including employment, new orders, and prices. Upward trends in employment, input prices, and strong demand could leave the BoE in a holding pattern through Q3 2024.

In conclusion, the UK retail sales figures could affect investor expectations of an August BoE rate cut. However, wage growth and inflation remain the focal points for the BoE. The BoE will likely need more data points to gain confidence that inflation is sustainably returning to target, which may write off an August rate cut.