The latest figures from the Office for National Statistics (ONS) show that the UK economy, facing unexpected contraction, is increasing expectations of UK economy rate cuts in the run-up to the Budget.
With the numbers for August-October freshly released, the UK economy has shrunk by 0.1%, underperforming forecasts of a 0.1% increase. The figures for October alone likewise show a 0.1% decline.
This article will look at the causes and implications of this retraction, as well as other important recent news regarding the UK economy.
Primary Weaknesses: Jaguar Land Rover and Retail
Cyberattack Hits UK Manufacturing – UK Economy Rate Cuts
A fairly well-publicised cyberattack targeted Jaguar Land Rover near the end of August. This attack caused a production halt at all UK facilities lasting multiple weeks.
Jaguar Land Rover wasn’t the only company affected, with suppliers, logistics companies, and dealerships suffering the consequences.
Sharp Decline in Vehicle Production
The impacts were quite severe, enough to create a dent in the UK’s total production output. In the August-October period, vehicle manufacturing fell by 17.7%, significantly contributing to a 0.5% total production output loss.
The CMC estimates that the attack caused approximately £1.9 billion in losses for the UK economy.
Resumption of Operations
Jaguar Land Rover resumed operations in October, albeit later than expected. Initially, it planned a phased restart of manufacturing processes starting from the first, but it would delay this by a week. All factories were up and running at full capacity in mid-October.
As production resumed, the total production output effect was immediately apparent, rising 1.1% in October. However, economists weren’t satisfied, noting that the numbers are still far off from where they were in August.
Underperformance in the Services Sector
The services sector, accounting for around three-quarters of the UK economy, also had an underwhelming performance.
It remained flat in the August-October run, with some branches showing particularly alarming results.
In October, retail contracted by 0.3%, despite forecasts targeting a flat reading.
Economic Weakness and UK Economy Rate Cuts
Jack Meaning, a former adviser for the BoE and the current UK chief economist at Barclays Bank, didn’t mince words, calling the economy weak.
“It’s continuing the story we’ve seen more or less all the way through this year of growth decelerating from relatively strong numbers at the start to much weaker numbers now, and actually outright contraction,”
Meaning said, and continued “Ultimately part of the story today is that we didn’t see as much of a bounce-back of that Jaguar Land Rover closure as we had expected. We thought that would all bounce back pretty quickly; it looks like it might take a little bit longer.”
Barclays believes that uncertainty ahead of the Budget was the primary reason that held off people from large purchases and weakened the retail sector.
Rate Cuts Likely Ahead as UK Economy Slows
Inflation Eases Slightly in October
Inflation has been a significant concern for the UK, with rampant numbers throughout the recent period, veering dangerously close to the 4% point.
However, October brought a small recovery, the first drop in inflation rates since May, as the number dropped from 3.8% to 3.6%.
UK Inflation Still Highest Among G7 Economies
Be that as it may, the UK’s inflation rate remains the highest among the Group of Seven economies.
As such, easing inflation seems to remain the primary concern of British policymakers.
MPC Vote Points Towards Rate Cuts
With the MPC meeting soon, all likelihood points towards a 5-4 vote in favour of rate cuts.
This would cut borrowing rates from 4% to 3.75%.
Pay Growth Stalls Amid Economic Pressures
With that in mind, November’s inflation data comes a few hours ahead of the MPC’s vote.
A major surprise may shake up the vote and cause an unexpected stall. Projections from Reuters place inflation edging downwards to 3.5%.
Another significant issue is pay growth. It has stalled, and analysts expect further slowdown in November. The Office for National Statistics will release the data on the same day as the monthly inflation figures.
So, while a rate cut seems imminent, chief UK economist at Oxford Economics, Andrew Goodwin, noted that it’s far from the 90% chance that investors are pricing in. Namely, the balance hangs on the Governor of the Bank of England, Andrew Bailey.
Governor Bailey’s Role in UK Economy Rate Cuts
Bailey has so far only briefly spoken on interest rates. Last month, he hinted that he may vote in favour of a cut if inflation shows easing. While it did, the question of how much of a reduction in inflation he was looking for.
This leaves a small chance of him joining the hawkish side and voting to keep rates at the same level. Goodwin, however, added “It’s notable that Bailey has chosen not to push back against expectations of a December cut.”
History of UK Economy Rate Cuts
In recent history, UK rate cuts have been difficult to project. With inflation nearly doubling its 2% target, the BoE has had to be more careful with cuts compared to central banks in other major economies.
The ECB’s interest rate is currently at 2%, and with three back-to-back cuts, the Fed seems to have neared the end of its cutting cycle as well.
Investor Expectations and UK Economy Rate Cuts for 2026
Likewise, due to a sensitive economic situation, investors expect the BoE to be cautious with cuts in 2026, currently only expecting a single rate reduction in 2026.
As such, the upcoming decision may be quite meaningful for GBP and UK stocks and indices.
Market Expectations
On Monday, ahead of the announcement, GBP is showing strength against the dollar, trading around the mid-1.33 range. This is supported by relative weakness in the USD, a constant throughout this year.
However, with expectations of UK economy rate cuts and without further guidance, the pound is unlikely to challenge higher price points.
Traders are also advising caution. Optimism seems to be holding up the GBP. However, with important data releases during the week, a fall may happen quite rapidly.
El rate cut may also soften the sterling, as although normally cuts lead to economic improvements bolstering national currencies, they also often have an adverse effect in the forex market.
The time after the cut will be important for forex traders to watch. Bullish movement is expected for the pound as a result of the cumulative pressure from the expected cut and the economic releases that precede it closely.
However, a surprise is possible, as overwhelmingly positive news may outweigh the downward pressure on the pound.
A highly volatile market is expected, and traders who don’t perform well under such conditions may wish to consider moving to other currencies in the lead-up to and after the announcements.
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