Base rate cuts on cards as UK exits recession

Britain is set to exit recession on Friday, when the Office for National Statistics is expected to say that gross domestic product grew by 0.4 percent during the first quarter.

Aside from the official end to the latest recession, this week is also likely to see the Bank of England’s Monetary Policy Committee indicate that cuts to its base rate are imminent.

Economists believe that the ONS will say that the economy grew by 0.2% in March, taking growth for the quarter to 0.4 percent. That would bring an end to what economists say will be regarded as a “short, shallow recession” which witnessed the economy contract by just 0.4 percent.

A recession is defined as two or more consecutive quarters of economic contraction and for the third and fourth quarters last year, UK GDP shrank by 0.1 percent and 0.3 percent respectively.

Paul Dales, chief UK economist at Capital Economics, said that the rebound in first quarter GDP is likely due to increased consumer and Government spending. “The first quarter GDP data will confirm that the recession has ended and that it was short and small,” he said. “GDP would need to fall by an unlikely one percent monthon-month or more in March for the economy to contract in Q1.”

The day before, the nine members of Bank of England’s MPC are tipped to vote 8-1 in favour of keeping its base rate at 5.25 per cent, where it has been since August. However, given better than expected growth and inflation data, the MPC is expected to update its forecasts and indicate that cuts will be imminent. Pantheon Macroeconomics chief UK economist Robert Wood said that the first rate cut could come as soon as June and be followed by another three this year, with four more in 2025.

Markets have priced in four quarter point cuts for the remainder of this year and next. “We expect Thursday’s MPC meeting and new inflation forecasts to signal that the Bank plans to cut interest rates faster and by more than markets are currently pricing,” he said.

Jack Meaning, Barclays’ chief UK economist, said that while it expects the MPC to begin its rate cutting cycle in June, it will leave itself next week with some wiggle room to delay it, if it needs to. He said: “We expect a change in the messaging to indicate that the MPC is inclined to begin cutting its bank rate, conditional on the data evolving in line with its updated forecast.”