Bank of England official hints at interest rate shift as UK faces recession

One of the Bank of England’s most hawkish policy makers has signalled he will stop calling for higher interest rates if inflation continues to cool.

Jonathan Haskel, who had been pushing for more rate hikes, said he was encouraged by last month’s “broad based” fall in inflation because more reliable indicators of price changes are also starting to ease.

It came as official figures showed Britain is on the brink of recession, cementing bets that the Bank will start cutting interest rates in May.

The economy shrank by 0.1pc between July and September, according to the Office for National Statistics (ONS), which had previously recorded zero growth for the period.

While the Imperial College Business School professor, who has voted four times to raise interest rates to 5.5pc from 5.25pc since August, insisted that he would not shift his stance “based on one month data”, a darkening economic backdrop will pile more pressure on the Bank to cut rates to kickstart growth.

Ellie Henderson, an economist at Investec, said a winter recession was now “far more likely” after the economy shrank by 0.3pc in October. Another quarter of economic decline would mark the first technical recession since the first pandemic lockdown.

Inflation, as measured by the consumer prices index (CPI), fell to 3.9pc in November from 4.6pc in October, sparking a stock market rally and predictions that mortgage rates will fall further in the New Year.

Mr Haskel said another closely-watched measure of services inflation, which strips out volatile factors like air fares, had also seen a notable decline.

He wrote on social media site X, formerly Twitter, that this was “news” because the declines were more “broadly based” than in previous months.

Friday’s updated ONS figures also revealed that the economy performed worse than expected between April and June.

Instead of growing by 0.2pc in the second quarter, as the ONS had previously estimated, the economy flatlined.

Barclays joined a growing chorus of economists who are bringing forward their expectations of rate cuts. 

Jack Meaning, chief UK economist at Barclays, said: “Inflation is falling faster than anticipated. Lacklustre growth and more evidence that slack in the labour market is emerging lead us to bring forward the timing of the first 25 basis point cut from August to May 2024.”

Barclays believes rates will fall to 3.25pc by early 2025.

The growth figures reveal the impact of high interest rates on UK households and will serve as a blow to Prime Minister Rishi Sunak, who at the start of the year made expanding the economy one of his five key pledges.

They also mean the UK’s post-pandemic recovery is now worse than any other G7 economy except Germany.

Jeremy Hunt, the Chancellor, insisted “the medium-term outlook for the UK economy is far more optimistic than these numbers suggest.”

In more encouraging signs, shop sales rose by more than expected in November as Black Friday discounts boosted spending on toys and make-up ahead of Christmas.

Retail sales volumes rose by 1.3pc in November, according to the ONS, which far exceeded analysts’ expectations of 0.4pc.

Sales growth in October was also revised up to 0pc after the ONS previously said sales fell by 0.3pc.

Darren Morgan, director of economic statistics at the ONS, said: “Retail sales grew strongly in November as heavy Black Friday discounting encouraged shoppers to spend.”

But Mr Morgan warned: “It’s still a challenging time for retailers.”

On a quarterly basis, retail sales fell by 0.8pc in the three months to November. Sales were also still below pre-pandemic levels.

Non-food sales volumes were down by 2.7pc compared to pre-lockdown.

Lisa Hooker of PwC said: “In spite of the headline improvement in sales last month, Christmas is still likely to come down to the wire for retailers.”

PwC has warned that consumers are planning to spend less than normal in the run-up to Christmas because of the rising cost of living. This increases the likelihood that shops will need to use Boxing Day sales to clear out seasonal stock, Ms Hooker said.

“The golden quarter will have been a disappointment to many retailers,” she added, referring to the traditional festive selling season.