Bank of England Signals Rate Cut as Jobs Slow

Source Credit : Portfolio Prints

Governor Andrew Bailey warns of further dovish action as UK labour market softens.

Economic Overview

The Bank of England (BoE) is strongly hinting at interest rate cuts amid mounting evidence of a cooling UK economy:

• In a new interview with The Times, Governor Andrew Bailey said that growing slack in the job market—driven by rising unemployment and softer wage growth—may prompt the Bank to consider larger or faster rate cuts beyond the standard pace.


• At present, the Bank Rate is 4.25%, following four quarter-point reductions over the past year, with the next decision due on August 7, 2025.


• Money markets now price in roughly an 85% chance of a rate cut at that meeting.

Labour Market Weakness Signals

New surveys and data paint a bleaker labour picture:

• The REC/KPMG survey reports the fastest rise in job hunters since the Covid era, as permanent hiring slows and wage growth loses momentum. Unemployment has crept up to 4.6%, the highest level in four years.


• Private sector regular pay growth slowed to around 5.3%, down from 5.5%, with overall earnings posting their weakest monthly rise in four months


• Businesses attribute the slowdown to the Chancellor’s increase in employers’ National Insurance contributions (NICs) from 13.8% to 15% in April, which has prompted cuts in hours and more modest wage increases.

Market Reactions & Forecasts

Markets are reacting swiftly to the dovish tone:

• The British pound fell around 0.2%, reaching $1.3467, its lowest in three weeks, as traders ramp up bets on a near-term rate cut.


• GDP data compounds concerns—UK output contracted by 0.1% in both April and May, reinforcing expectations for impending policy easing .


• On the Monetary Policy Committee (MPC), dissent is growing: Alan Taylor, a member, recently advocated for five total rate cuts in 2025, pushing for more rapid easing toward a 2.25% rate by late 2026 under downside scenarios


• Economists from firms like ING and Deutsche Bank foresee one to three additional rate cuts before year-end, potentially bringing rates down to 3.5%.

What It All Means

• Monetary policy is clearly pivoting dovish: Bailey emphasized a "downward path" for interest rates while retaining the mantra of “gradual and careful” action given that inflation remains around 3.4%.


• The BoE is walking a tightrope: inflation needs to return sustainably toward its 2% target, but not at the cost of undermining fragile growth.


• Upcoming data—especially the June inflation report due mid‑week—is expected to be decisive in reinforcing markets’ rate‑cut expectations.

Key Upcoming Events

• Next Monetary Policy Committee (MPC) decision: 7 August 2025—widely anticipated rate cut to 4.00%.


• June Consumer Price Index (CPI) report: crucial input for rate‑cut timing and scale.


• Labour and jobs data: continued increases in unemployment or slower wage growth could accelerate the MPC’s pivot.

Issues and Implications

Issue	Implication
Cooling labour market	Creates slack → inflationary pressure eases
Employer tax hikes (NICs)	Hampers hiring and wage growth
Weak GDP (+ inflation>3%)	Justifies cautious but accelerating easing
Market pricing	~85% chance of an August rate cut

In short: With unemployment rising, hiring slowing, wage gains slipping, and economic growth faltering, Governor Bailey is signalling a clear shift towards interest rate cuts. The Bank of England appears ready to accelerate its easing path—but proceeding with “gradual and careful” caution as it seeks to navigate inflation above target.