Bank of England Rate Cut Forecast For Next Month
- Written by: Gary Howes
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Economists react to a soft UK labour market report.
The odds of a March interest rate reduction at the Bank of England rose sharply after it was reported UK payrolls fell for a fifth consecutive month in January, and the unemployment rate rose to a five-year high at 5.2% in December.
Wages also fell materially, leading economists to bet that the disinflation trend in the UK would continue.
"For the Bank of England, today’s data will only add to market expectations that more rate cuts are coming. We stick to our basecase for two more rate cuts this year (and likely by summer). Talk of risk management considerations will only rise from here," says Sanjay Raja, an economist at Deutsche Bank.
Economist Andrew Wishart at Berenberg Bank says companies no longer need to offer generous compensation to retain staff and they paid smaller Christmas bonuses than a year earlier.
As a result, total pay growth slowed from 4.6% yoy in the three months to November to 4.2% 3m yoy in December
"Soft UK labour market data for December and January increases the chance that the Bank of England (BoE) will cut interest rates on 19 March already instead of waiting until the end of April as we forecast," says Wishart.
"The UK jobs market is still cooling, even if much of the weakness is concentrated in consumer-facing industries," says James Smith, Developed Markets Economist for the UK at ING Bank.
He thinks wage growth has further to fall, and that's why ING expects Bank of England rate cuts in March and June, while not ruling out further moves thereafter.
Bank of England Governor Andrew Bailey recently stated that he would be adopting a meeting by meeting approach on rates, allowing him to take in the data.
"It is clear where the bias lies with one key swing voter. Today’s data will make Bailey more confident on cutting rates," says Derek Halpenny, Head of Research for Global Markets EMEA at MUFG Bank.
Catherine Mann, a 'hawk' on the Bank's Monetary Policy Committee recently wrote in the Telegraph that she's concerned about the scarring inflation has left on households.
She appeared ready to shift towards favouring a cut.
"Today’s data will make her more confident in cutting rates. CPI data as expected tomorrow will reinforce our view of a March rate cut and keep the pound under downward pressure," says Halpenny.
