Bank of England faces pressure to ease rates as economic figures disappoint
The Bank of England is coming under renewed pressure to loosen monetary policy after the sharpest employment contraction in five years and a marked cooling in wage growth signalled mounting slack in the British labour market.
Figures released by the Office for National Statistics this week have painted a picture of growing fragility across the jobs sector, with payrolled employment down 109,000 in May alone - the steepest monthly decline since the early months of the pandemic. Unemployment, meanwhile, edged up to 4.6%, the highest since 2021.
The dismal data has prompted financial markets to strengthen bets that the Bank will implement at least two further quarter-point cuts before the year is out. Traders are now fully pricing in a reduction in September, with expectations for a second cut by December rising sharply - from 60% at the start of the week to near 90%.
Gilt yields, particularly at the short end of the curve, tumbled in response. The two-year yield, which is closely tied to monetary policy expectations, fell to 3.93% - its lowest point in a month. The pound lost 0.7% against the dollar, its weakest showing in a month, and slipped to a three-week low against the euro.
“We are seeing a clear deterioration in labour market conditions,” Mike Riddell, a portfolio manager at Fidelity International told Bloomberg. “If this pace continues, it’s likely the Bank will resort to quarterly cuts.”
The Bank has already lowered the base rate twice this year, bringing it to 4.25%. The question now facing Governor Andrew Bailey and his colleagues is whether the softening jobs data outweighs the persistent stickiness of inflation, still running at 3.5% - well above the 2% target.
Pay growth, excluding bonuses, slowed to 5.2%, missing economists’ expectations and falling to its lowest pace since October. Private-sector wage gains - the metric most closely watched by Threadneedle Street - eased to 5.1% from 5.5%. Real wage growth has similarly softened, falling to 2.1%.
Even sectors that had previously been resilient are now shedding jobs. Retail and hospitality, which bore the brunt of Chancellor Rachel Reeves’s tax-raising Budget and minimum wage increases, have seen payrolls shrink by almost 150,000 since October.
“There continues to be weakening in the labour market,” said Liz McKeown, director of economic statistics at the ONS. “Feedback from our vacancies survey suggests some firms may be holding back from recruiting new workers or replacing people when they move on.”
The number of job openings declined for the twelfth consecutive quarter, falling by nearly 64,000 to 736,000 - now below pre-pandemic levels.
Options markets point to uncertainty over the near-term direction of sterling. Risk reversals, which gauge investor sentiment between bullish and bearish bets, have narrowed to parity - reflecting divided expectations amid a faltering domestic backdrop and persistent inflationary pressures.
Nevertheless, some analysts remain cautious. “Pay growth north of 5% is still inconsistent with 2% inflation,” said Ven Ram, macro strategist at Bloomberg. “It’s too soon to conclude that the Bank has a clear path to sustained rate cuts.”
Even so, the tone of recent data is shifting decisively in favour of further monetary easing. Yael Selfin, chief economist at KPMG UK, said: “Today’s figures provide the Bank with tentative evidence that rising labour costs are unlikely to drive renewed wage pressures.”
The Monetary Policy Committee was already divided at its most recent meeting, with two members voting for a larger cut and two preferring to hold. If incoming data continues on its current trajectory, the case for further loosening may prove irresistible.
