The last few months have been particularly difficult for gilts, the bonds issued by the British government. The return of former president Donald Trump and questions about the UK’s fiscal policy to boost economic activity and persistently high inflation have intensified investor concerns. This led to a significant rise in UK bond yields, with some maturities reaching levels comparable to those seen during the subprime crisis. Sterling has also been affected by these interest rate movements, weakening against the euro and the US dollar.

In recent weeks, it has therefore come as no surprise that many analysts have revised down their forecasts for the number of rate cuts by the Bank of England in 2025. Currently, financial markets are anticipating around two rate cuts of a quarter of a point each over the course of 2025.

Easing debate reignites

The economic indicators published this week could, however, rekindle the debate on the Bank of England’s monetary easing, prompting investors to revise their rate cut forecasts. This week, analysts and economists focused on December’s inflation figures and November’s GDP growth.

In November 2024, the UK economy grew by 0.1%, weaker than consensus expectations (0.2%). Industrial production weighed heavily on the economy. This slight rise in GDP offset the -0.1% fall of the previous month. However, by coming in below expectations, fears of stagnation or even contraction in activity in the final quarter of 2024 are very real. In response to this weakness in economic activity, the Bank of England, which is seeking to avoid too rapid a deceleration in growth (hard landing), must take appropriate measures.

Inflation still high in services

The main factor likely to restrict the Bank of England’s action remains inflation. However, recent inflation data is encouraging. Although inflation remains high, rising from 2.6% to 2.5% in December, it is important to note the significant fall in services inflation, from 5% to 4.4% over the same month. This favourable trend in services inflation enabled underlying inflation to fall to 3.2%, compared with 3.5% previously.

Although it is premature to speak of a downward trend in core inflation, the fall seen in December in an environment of sluggish growth led to an easing in UK interest rates on the financial markets and considerably increased the likelihood of a quarter-point rate cut by the Bank of England at its February meeting. If inflation, while still high in the short term, were to show encouraging trends in the underlying components over the coming months, and the UK economy continues to lack dynamism, despite the spending plans of the current government, then the Bank of England could consider more cuts than the markets are currently anticipating.

William Telkes is chief economist at Spuerkeess.

This article was originally published in .