Bank of England set to cut rates in August after June pause

The Bank of England has kept rates on hold at 4.25% and, more importantly, has offered little indication that the recent batch of worrisome labour market data warrants a faster pace of easing. Taken at face value, the latest payrolls data showed the fastest monthly fall in employment outside of the pandemic since records for the figures began in 2014 – and these have now fallen in 9 out of the past 10 months. They do, however, have a tendency of being revised up, and for now, officials aren’t sounding the alarm bells on a more serious uptick in unemployment. Policymakers are not helped by the fact that several of the major data releases – including the unemployment rate, GDP and inflation – have all recently been subject to data quality issues or excessive volatility. The consensus at the Bank is, understandably, to wait for more information.

But we think the backdrop is becoming more favourable. Services inflation is likely to come under further downward pressure over the coming months, while wage growth is undershooting the Bank’s May forecasts. Given how far the jobs market has cooled (and continues to), we suspect wage growth will come materially lower by the end of this year.

Does that mean faster rate cuts? For now, we think it’s unlikely. Yes, three out of nine officials voted for an immediate rate cut this time. Investors may well take that as a hint that the tide is turning on the committee. But past experience has shown that the vote split contains few useful signals. December’s meeting saw a similar 6-3 vote, yet heralded little change in the Bank’s overall stance.

The hawks, meanwhile, will also have a beady eye on oil prices. Though the rise so far won't make much difference to the inflation outlook – and officials commented that it had little bearing on this latest decision – we know some at the Bank are wary of a repeat of 2022, where a rise in energy prices turned into a much wider and more persistent services-driven inflation episode.

The wider circumstances today look very different, though. For one thing, the labour market is much looser today than it was back then, offering less scope for workers to recoup disposable income lost to higher oil prices. That said, a much more serious spike in oil prices is the most obvious hawkish risk for the UK rate outlook right now. That aside, our base case is that the BoE cuts rates in August and November, and twice more in 2026.

The pound’s reaction to the BoE announcement was very muted, as the vote split seemed to merely endorse markets' well-established expectations for a cut in August.

We retain a short-term target in EUR/GBP at 0.860. Geopolitical risks and a potential return of trade-induced market volatility in July argue that the balance of risks remains tilted to the upside for the pair despite the recent rally.

There is also a non-negligible possibility that another batch of soft UK data can prompt markets to speculate on an acceleration in BoE rate cuts. When adding the additional risks to UK growth, the jobs market and the prospect of fiscal tightening, we think the pound can underperform most G10 currencies in the second half of 2025, with EUR/GBP breaking above 0.870.