This week on Wednesday, the Bank of England’s interest rate decision meeting will be held, and the market largely expects the interest rate to remain unchanged at 3.75%. It is also expected that the divide among BOE members (differences of opinion over interest rates) will be narrower at this meeting.
This week on Wednesday, the Bank of England’s interest rate decision meeting will be held, and the market largely expects the interest rate to remain unchanged at 3.75%. It is also expected that the divide among BOE members (differences of opinion over interest rates) will be narrower at this meeting.
An unprecedented split until data clarified the outlook
At the previous meeting, in a rare occurrence, five members voted for a rate cut and four voted to keep the interest rate unchanged. The vote was very close, and the meeting is interpreted as a hawkish cut. However, after the December meeting, employment and inflation data have highlighted signs of economic weakness, making a move by the BOE toward rate cuts this year more likely.
The labor market has been hit in the shadow of the Reeves budget
According to data from the ONS, employment in December fell sharply by 43,000, which was twice market expectations and marked the largest decline since 2020. Since Reeves’s first budget in October 2024, around 220,000 jobs have been lost. Alongside the decline in employment, wage growth has also fallen to its lowest level in the past three and a half years. Private sector wage growth (excluding bonuses) declined to 4.5% in the three months ending in November, indicating easing inflationary pressure from labor costs. However, wage growth in the public sector, at an unprecedented 7.9%, recorded its highest level in at least the past 24 years.
What do we expect from the upcoming meeting?
Although the data reflects weakness in the labor market, it does not appear sufficient to force the BOE into an immediate interest rate cut, as wage growth remains inconsistent with the BOE’s inflation target. Regarding the upcoming meeting, given expectations of easing inflation and labor market weakness, the Bank is likely to adopt a more dovish stance compared with the previous meeting.
Warning: If the increase in oil prices driven by Middle East tensions persists, it could raise U.K. inflation by 0.2%, which would pose a challenge to the rate cutting plan.