Central Bank Pressured to Maintain Interest Rates Despite Job Losses
In an anticipated move, the Monetary Policy Committee (MPC) of the Bank of England is widely expected to cut interest rates by 25 basis points at their August 7, 2025 meeting. This decision would lower the Bank Rate from the current 4.25% to 4.00%, marking the first reduction in 2025.
The expectation for a rate cut is driven by recent labour market data showing a slight drop in employment and easing wage growth, indicating some softening in economic conditions. The MPC has signalled a gradual easing path, with the current restrictive rate of 4.25% maintained in June but with hints that cuts are on the horizon if economic slowing and disinflation continue.
However, the bar for the Bank of England to accelerate cuts is still high, according to James Smith, a UK economist at ING. He notes that while inflation remains elevated at 3.6% (above the 2% target), recent data show signs of moderation in pay growth and a loosening labour market, which suggests inflationary pressures may ease over time.
Robert Wood, a UK economist at Pantheon Macroeconomics, advises the MPC to hold rates, citing the labour market's inactivity rate falling and wage growth remaining close to 5% year-over-year. Yet, market pricing and some MPC members lean toward a one-off insurance cut in August given the dovish tone and data.
Market predictions reflected in rate swaps strongly price in a rate cut in August, potentially followed by another near year-end, aiming to bring rates down to around 3.75% by late 2025 if inflation continues to slow and GDP growth remains weak.
While a unanimous view is absent, with some MPC members still preferring to hold, the consensus and market probabilities increasingly favour a 25 basis point cut in August 2025. This move aims to balance the need to support growth amid weakening labour market signals with the ongoing challenge of curbing inflation above target.
Meanwhile, economists at Pantheon Macroeconomics and Capital Economics hold differing views on the Bank of England's interest rate decisions. Paul Dales, chief UK economist at Capital Economics, states that new figures show firms are reducing headcounts at a speedy pace, "weighing on inflation". Conversely, Wood believes the MPC should keep rates on hold due to inflation being 160 basis points above their target, the recovery of the PMI in June, wage growth close to 5% year-over-year, and likely still rising employment.
As the August meeting approaches, City analysts will be looking out for how Governor Andrew Bailey and external member Catherine Mann vote. The MPC's decision will have significant implications for the UK economy, as it navigates the delicate balance between stimulating growth and managing inflation.
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- The upcoming August meeting of the MPC will likely see discussions about the impact of low interest rates on the finance and insurance industries, as well as broader implications for the business sector and overall economic outlook.
