Hoping for interest rate reductions wanes due to persistently strong wage growth
The Bank of England (BoE) is treading carefully in its pursuit of interest rate cuts due to the weak UK employment figures, particularly in the private sector, and the persistence of inflation above its 2% target.
In July, the number of employees on UK payrolls declined by 8,000, marking the sixth consecutive month of decreases. Wage growth, excluding bonuses, remains stubbornly high at 5%, a rate that usually corresponds to 2% consumer price inflation. This is the highest unemployment rate since 2021.
The BoE recently cut rates by 25 basis points to 4% in August 2025, a move that was broadly expected but narrowly decided with a 5-4 vote, reflecting the balance between weak labor market signals and inflation concerns.
The BoE's focus on a "gradual and careful" approach to rate cuts is evident in its recent statements. Governor Andrew Bailey cautioned that any subsequent rate cuts must be done in the same manner.
Inflation remains slightly above expectations at 3.6% year-on-year (June 2025), with particularly sticky services inflation at 4.7%. This persistence means the BoE needs confidence that inflation will sustainably fall before easing rates further.
The market and analyst outlooks, such as Goldman Sachs, expect further rate cuts over late 2025 and into 2026, potentially to around 3%. However, the pace is expected to be gradual and data-dependent—there is a risk that upside inflation or improving labor market conditions could lead the BoE to pause cuts.
The Bank of England's chances of another interest rate cut by the end of the year are less clear-cut after the hawkish meeting. Economist James Smith at ING Bank suggests that the BoE can still afford to cut rates in November, though the call has become less clear-cut. On the other hand, Andrew Wishart at Berenberg expects the Bank to hold off from another interest rate cut until 2026.
The UK labor market shows weakness mainly in the private sector, signaling economic softness that usually warrants looser monetary policy. However, the BoE's primary concern remains inflation, which it now expects to hit 4% later this year, double its 2% target.
In summary, the BoE is positioned to continue gradually cutting interest rates in response to a weakening labor market but remains cautious due to inflation running above target and sticky core price pressures. The timing and extent of future cuts depend heavily on upcoming inflation readings and employment trends, with a potential terminal rate near 3% by early 2026 according to some forecasts.
Businesses might consider seeking insurance to protect against potential economic fluctuations or financial instability, given the BoE's gradual approach to interest rate cuts and the high inflation rate. On the other hand, mortgage lenders could find investing in longer-term financial instruments more attractive, as the BoE's projected terminal rate nears 3% by early 2026, offering relatively higher returns for long-term investments compared to shorter-term options.
