Bank of England to keep rates on hold despite jobs market wobble

The Bank of England is highly unlikely to cut rates this month, but should it?

An increasingly bad run of jobs data, which has seen employee numbers fall for 9 out of the past 10 months at an ever-increasing rate, certainly raises the possibility that the Bank needs to speed things up a bit.

The hawks at the BoE would point to wage growth, which, despite the material cooling in hiring, has remained stubbornly high. But that is starting to change. Private sector pay growth has fallen from 6% to almost 5% in the space of a couple of months. That’s partly a base effect story, but it also reflects a genuine cooling in pay pressures, too. It’s running roughly half a percentage point below the Bank’s most recent May forecasts.

Admittedly, inflation generally still looks problematic – at least from the headline numbers. Overall CPI is at 3.5% and is set to stay north of 3% for the rest of the year. Again, the hawks at the BoE – notably Chief Economist Huw Pill – are wary about this triggering a change in price-setting mentalities among both firms and consumers. This is borne out of the experience of 2022, where higher gas and food prices seeped into the broader service sector.

Services inflation indeed remains far too high, having risen almost a percentage point to 5.4% in April. Yet that rise was almost entirely due to an increase in road tax, as well as the timing of Easter. The Office for National Statistics has since conceded that road tax was overestimated, and adjusting for that, we think services inflation will be back at 4.6% in May. Over the coming months, the contribution from rents should decrease materially. And once the impact of big April price hikes filters out of the annual comparison, it should fall well below 4% next spring.

In short, we’re more optimistic about the inflation outlook than the Bank. And we think that will increasingly be reflected in the BoE’s thinking over the coming months.

Those weaker jobs numbers might tempt an extra one or two officials to vote for a rate cut this month. Having voted for a larger 50bp cut in May, it would be a surprise if Alan Taylor and Swati Dhingra didn’t at least vote for a 25bp cut this month. At a minimum, then, we’re looking at a 7-2 vote in favour of keeping rates on hold this time. It may well be 6-3.

If that were to happen, it would be tempting to conclude that the consensus on the Bank is turning towards a faster pace of easing. Yet history shows us that these vote splits don’t carry a particularly reliable signal about future policy changes. The four external committee members, including Taylor and Dhingra, are historically much more activist than the core committee.

By contrast, the five internal members, including Governor Andrew Bailey, tend to vote as a pack, even if formally at least, policy isn't set through consensus. In other words, two or three external members voting against the consensus isn't particularly indicative of what the internal members will do next.

Then there’s the question of the Bank’s forward guidance. For months, this has simply said that further easing will be “gradual and careful”. We’d expect this line to be reiterated again this month.

In short, barring big surprises in the data over the next month, we think the latest disappointing jobs numbers help cement an August rate cut. Bear in mind that at 4.25%, Bank Rate is still very much in restrictive territory, which offers the Bank plenty of scope to keep lowering it. We expect a further cut in November and two more moves in 2026, taking the terminal rate to 3.25%. Markets have moved more in this direction over recent weeks and are currently pricing a slightly higher end point than we are, of 3.55%.