Jobs data increases odds on Bank of England interest rate cut

Yahoo

17-07-2025

Investors remain confident that the Bank of England (BoE) will cut interest rates next month after unemployment rose to a four-year high.
This Thursday, data from the Office for National Statistics (ONS) showed the UK jobs market continued to cool in May, with unemployment ticking higher and pay growth slowing. The rate of unemployment rose to 4.7% in the March to May period, up from 4.6% for the three months to April.
The number of employees on the payroll in May was down by 25,000 on the month, though this was lower than a previous estimate of 109,000 and less than a decline of 55,000 in April.
The data is likely to cement the case for the Bank of England to cut interest rates next month in a bid to boost the economy.
Since its first quarter-point rate cut last August from the 16-year high of 5.25%, the Bank of England has been cautious, reducing interest rates every three months to the current 4.25%.
Read more: UK inflation unexpectedly rises in June on higher fuel prices
The Office for National Statistics (ONS) said consumer prices rose by an annual rate of 3.6% in June, up from 3.4% in May. That was the highest rate since January 2024.
The ONS added that higher food prices were primarily behind the increase. Fuel and transport costs also contributed.
Money markets indicate there is an 89% chance that policymakers will lower borrowing costs in August, up from an 87% probability on Wednesday.
Suren Thiru, economics director at ICAEW, said: 'June's uptick is the start of a slight summer surge in inflation with skyrocketing business costs and global trade turbulence likely to lift the headline rate moderately higher by the autumn, despite July's drop in energy bills.
'While June's hot inflation won't deter policymakers from sanctioning an August policy loosening, given mounting worries over economic conditions, these figures may increase caution over the pace of future rate cuts.'
Services inflation, a measure the central bank views as a better guide to domestically generated price pressures than the headline rate, held steady at 4.7% in June.
Read more: UK jobs market continues to cool as pay growth slows
Sanjay Sanjay, Deutsche Bank's chief UK economist, said: 'A 'gradual and careful' approach seems appropriate for now. And we do not think that the bar for faster rate cuts has been met just yet.
'The labour market is loosening, but perhaps not as fast as the unrevised payroll data suggested.'
Last month, the central bank's Monetary Policy Committee (MPC) voted six to three to keep rates unchanged at 4.25%, following a quarter-point cut in May.
The MPC, which has an inflation target of 2%, has reduced interest rates four times since last summer.
Chris Beauchamp, chief market analyst at IG, said: "[Wednesday's] CPI data spells more pressure for consumers thanks to the surge in food prices, but the overall picture doesn't quite spell the end for any further rate cuts.
"Core goods and services inflation was broadly contained, and the focus shifts now to the job numbers tomorrow to see if there are further signs of weakness that might keep the Bank of England on course to ease policy in upcoming meetings."
Traders are betting on lower borrowing costs in August but are no longer pricing in a second cut before the end of the year, although derivates trades indicate this scenario is still considered likely.
Read more: Bank of England could cut interest rates faster if jobs market slows, Bailey says
Isaac Stell, investment manager at the investment service Wealth Club, said: "The surprising strength of the inflation figures adds additional issues to the UK's mounting economic woes. All eyes will turn to the Bank of England who have indicated they are willing to cut rates given the cooling in the jobs market but are unlikely to be able to justify a cut when inflation has started to run hot once again.
"In the absence of interest rate cuts, consumers are likely to feel a continued squeeze, unhelpful for the government's growth agenda which has yet to show signs of life itself. Awful April has rolled into miserable May and in turn rolled into joyless June. The government will now pin its hopes on a Jubilant July."
Andrew Sentance, who sat on the Monetary Policy Committee from 2006 to 2011, said it would be 'irresponsible' for it to cut interest rates after the jump in inflation.
Bank governor Andrew Bailey said in an interview with The Times newspaper earlier this week that rates could be cut further if the jobs market slows down, saying 'I really do believe the path is downward'.
Yael Selfin, Chief Economist at KPMG UK, said slowing pay growth had 'opened the door' for an interest rate cut in August'.
She said: 'Slowing activity in the labour market, coupled with pay pressures easing, will likely prompt the Bank of England to lower interest rates next month.
'The impact of April's tax and administrative changes has led to a marked slowdown in hiring activity among firms.
Read more: FTSE 100 LIVE: Stocks higher as UK unemployment hits four-year high and wage growth slows
'With domestic activity remaining sluggish, the MPC will likely want to provide support via looser policy to prevent a more significant deterioration in the labour market.'
Sarah Coles, head of personal finance at Hargreaves Lansdown and Yahoo Finance UK personal finance columnist, said: "The Bank of England was hoping for bad news from the labour market, and it got what it wanted: wage growth has slowed and unemployment has risen again. For the Bank, this is a sign of growing slack in the labour market, which is likely to ease inflationary pressures, and mean it can cut rates sooner rather than later."
The Bank of England will announce its decision on interest rates on 7 August around noon.