An index of discretionary retail stocks has tumbled 26% this year as consumer confidence slumps to the lowest since 2008, while nearly 2,000 businesses are in critical financial distress. The pound is trading at levels not seen since the early days of the pandemic, and money markets bet central bankers will have to cut rates in coming years after sharp hikes in 2022.
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U.K. markets are sounding the alarm over a potential recession and piling pressure on the Bank of England in order to balance curbing surging inflation with protecting growth.
It’s a “pretty ugly backdrop” to set the scene for the BOE’s meeting next week, according to BlueBay Asset Management’s Mark Dowding. Policy makers will have to take in a rash of bad news, with retail sales weaker than anticipated and inflation at a three-decade high.
The central bank is widely expected to lift interest rates again Thursday and money markets expect more hikes at each meeting this year, piling further pain on borrowers. BOE Governor Andrew Bailey has already noted the difficult path bankers need to tread to avoid potentially triggering a recession.
“The market is definitely of the view that the U.K. is more vulnerable here,” said James Lindley, a portfolio manager at BMO Global Asset Management. “If we didn’t have inflation, we would be thinking about cutting not raising interest rates.”
Britain’s inflationary shock will be harder to address than in any other leading industrialized nation, the International Monetary Fund has warned. Here are charts showing how markets are dealing with the risks.