After data shocks, traders predict more Bank of England rate cuts in 2025.

• This week, weak retail sales added to the run of data surprises, prompting traders to increase their bets on the Bank of England rate cuts this year.
• The Office for National Statistics reported that sales volumes decreased by 0.3% month-on-month in December, which was lower than the 0.4% increase predicted by economists in a Reuters poll.
• The challenges facing Finance Minister Rachel Reeves are further compounded by the disappointing retail data, which contributes to the dim economic outlook in the U.K.

This week's run of data surprises, including weak retail sales, has led traders to predict more Bank of England rate cuts this year.

The Office for National Statistics reported that sales volumes decreased by 0.3% month-on-month in December, which was lower than the 0.4% increase predicted by economists in a Reuters poll.

During the holiday period, consumer behavior was influenced by cautious spending, as stated by Nicholas Found, head of commercial content at Retail Economics. He added that the cost-of-living crisis continued to impact consumer behavior, as shown in the figures.

The BOE is expected to cut interest rates by more than 75 basis points in 2025, following the Friday release. This is an increase from the previously expected 65 basis points of cuts. However, this expectation eased back to 70 basis points later on Friday. The central bank's next meeting is on February 6, and a quarter-point cut is widely anticipated.

The disheartening retail figures contribute to the gloomy economic outlook in the U.K. and pose additional difficulties for Finance Minister Rachel Reeves, who is determined to revive the economy and reduce the country's debt-to-GDP ratio during her first full term in office.

The U.K. economy grew by 0.1% in November and stagnated over a three-month period. Meanwhile, inflation cooled more than expected to 2.5%, increasing market bets on the extent of BOE rate cuts this year after the half-percentage point reduction in 2024.

Recent volatility in the global bond market has been felt acutely in the U.K., with borrowing costs easing this week but long-term debt premiums reaching 27-year highs and short-term yields elevated to levels not seen since the Financial Crisis.

The possibility of increased mortgage rates has sparked doubts about whether Reeves will reveal additional tax increases or budget cuts to adhere to her financial targets.

The U.K. economy is facing a significant challenge, as evidenced by the high bond yields in the country, according to Craig Inches, head of rates and cash at Royal London Asset Management, who spoke on CNBC's "Street Signs Europe" on Friday.

"The U.K. base rate is higher than many markets worldwide, so the Bank of England should cut interest rates at the February meeting, according to our forecast, which predicts four cuts this year."

Philip Shaw, Investec's chief economist, stated in a Friday note that retail sales fluctuated significantly around Christmas. In December 2023, the monthly decline during the festive period was almost entirely offset by a surge in January.

Shaw stated that markets are not giving the U.K. the benefit of the doubt, as evidenced by the decline in sterling against the euro and U.S. dollar on Friday.