Labour Market Slowdown Boosts Rate Cut Expectations
Fresh data revealing a significant weakening in the UK jobs market has dramatically increased the likelihood of an interest rate cut from the Bank of England as early as mid-December. The latest figures from the Office for National Statistics (ONS) show the unemployment rate climbed to 5 per cent, a sharper increase than many economists had predicted.
Concurrently, wage growth showed signs of moderating. The overall rate of pay growth softened slightly to 4.6 per cent on the month. More critically for the Bank's decision-makers, private sector wage growth, a key metric watched by the Monetary Policy Committee (MPC), slowed further to 4.2 per cent for the three months leading to September.
Markets and Economists React to Softer Data
Financial markets have swiftly adjusted their forecasts in response to the new data. They are now pricing in a three-in-four chance of a rate reduction at the Bank's next meeting, a probability higher than previously anticipated.
Yael Selfin, chief economist at KPMG UK, stated that the data strengthens the case for the Bank to resume its cutting cycle. "Moderating wage pressures and a softening labour market are expected to bring wage growth closer to levels consistent with the inflation target by the end of the year," Selfin explained. She added that an increase in people seeking work is weakening workers' bargaining power, which should cause private sector pay growth to fall further.
This sentiment was echoed by Hargreaves Lansdown analyst Matt Britzman, who confirmed that the lower wage growth "fuels hopes" for another cut. The Bank had previously left interest rates on hold at 4 per cent during its decision last week.
Gilt Rally and Cautious Warnings
The prospect of lower interest rates had an immediate effect on the UK government bond market. Gilts rallied on Tuesday, with yields on five-year, ten-year, and thirty-year bonds all falling by approximately five basis points. Gilt yields move inversely to prices, and the expectation of a rate cut boosts demand for existing bonds that offer higher interest payments.
This market movement has positive implications for public finances, as higher gilt yields lead to increased debt interest payments for the government. These payments are projected to reach over £110bn this year, a figure that could severely strain the budget.
However, not all signals are unequivocally positive. Investec economist Ellie Henderson issued a note of caution, pointing out that pay growth remains above 4 per cent. "Pay growth in excess of 4 per cent is still above what would be deemed consistent with the Bank of England’s 2 per cent inflation target," Henderson warned. She noted that some policymakers at the Bank remain concerned about high inflation expectations, but there is a broad expectation that pay growth will ease to around 3.5 per cent in 2026.
