UK Economy Contracts, Boosting Expectations Of BoE Rate Cuts

The British economy unexpectedly contracted in October, intensifying pressure on the Bank of England to begin easing policy sooner than previously anticipated. The GDP decline, though modest, marked the first negative print in several months and underscored the fragility of the UK’s post-budget recovery.

The contraction was driven by:

• weaker output in manufacturing and construction,

• soft consumer spending,

• and a noticeable slowdown in business investment.

Combined, these indicators suggest that elevated borrowing costs and persistent economic uncertainty are weighing heavily on activity.

Financial markets reacted swiftly.

UK gilt yields dropped across the curve, with traders now pricing in a near-90% chance of a BoE rate cut in December and additional easing expected in early 2026. Short-dated bond yields saw the sharpest moves as investors positioned for a more dovish trajectory.

Sterling, meanwhile, initially fell on the GDP surprise but later found support as broader risk sentiment improved. Still, the pound remains sensitive to incoming data and BoE commentary, with markets closely watching for signs that policymakers may formally acknowledge the need for policy adjustment.

UK equities showed resilience, with the FTSE 100 benefiting from a weaker currency and gains in energy and mining stocks. Domestic-focused indices underperformed, reflecting concerns about the softness in underlying economic conditions.

For traders, the message from today’s data is clear: economic momentum is fading, and the BoE may have little choice but to join its global counterparts in easing monetary policy sooner rather than later. All eyes now turn to upcoming inflation releases and the Bank’s final policy meeting of 2025, which could set the tone for the UK’s economic trajectory heading into the new year.