Bank of England urged to cut interest rates to four percent as labour market falters

The Bank of England is under mounting pressure to lower UK interest rates for the fifth time in a year, as concerns grow over the sluggish jobs market and the broader economic climate. According to the Times shadow monetary policy committee (MPC), seven out of nine panel members have recommended a quarter-point cut, bringing the base rate down to 4 per cent from 4.25 per cent. Should this shift occur, borrowing costs will have dropped by 1.25 percentage points since August last year.

The committee’s recommendation comes against a backdrop of rising unemployment and faltering wage growth. The latest figures from the Office for National Statistics indicate that the unemployment rate has climbed to 4.7 per cent, its highest level since 2021. Payrolled employment has now declined for five consecutive months, following a £25 billion increase in employer national insurance contributions and an adjustment to the national minimum wage. Karen Ward, chief market strategist at JP Morgan Asset Management and a proponent of the rate reduction, highlighted that the data shows a weakening trend and an increasingly troubling labour market.

Other experts on the shadow MPC, including former Treasury official Sir Steve Robson and ex-Bank of England deputy governor Sir John Gieve, also cited the weakened employment landscape as evidence to justify their support for a lower rate. They argue that such a move would mitigate some of the economic risks facing the country and help shore up business confidence.

Not all are in agreement, however, as two shadow panellists called for rates to remain unchanged. Andrew Sentance, a former Bank of England rate-setter, voiced concerns about persistent inflation. He noted that at the last central bank meeting in June, the inflation rate was projected to stay above 3 per cent for the rest of the year, against the Bank’s 2 per cent target. Services inflation, a key indicator for the Bank, held steady at 4.7 per cent in June, exceeding official forecasts. Core inflation also nudged upwards to 3.7 per cent.

There is a divide on the best course of action. Professor Anne Sibert of Birkbeck University of London warned that the uptick in inflation could warrant a rate increase, but ultimately recommended holding the line for now. The market expects a narrow vote from the official MPC in favour of a quarter-point reduction, with some external members pushing for an even larger cut. Bank of England Governor Andrew Bailey is believed to support the downward shift, although debate continues amongst senior officials.

The rate decision coincides with the release of the Bank’s three-year economic forecasts, which are anticipated to show a modest downgrade to near-term growth. Data from the ONS reveal the economy contracted by 0.3 per cent in April and 0.1 per cent in May. The impact of President Trump’s trade war, partially alleviated by a recent UK-US tariff agreement, is expected to temper the outlook for exports. The central bank is also reviewing the effects of its government bond sales on the function of the gilt market.