Softening UK jobs market paves way for BoE rate cut in March, says ING Group

Mounting evidence, from easing inflation to a softening jobs market, suggests the Bank of England’s fight against price rises is nearing a conclusion, with financial experts now predicting a shift to rate cuts in March and June, though February is considered too soon for action.

Despite the impending possibility of rate cuts, current economic data suggests the Bank’s task is incomplete, a view with which the Bank itself appears less certain and whose committee is clearly divided, ING Group said in a report on Wednesday.

Consider the labour market as an example. In 2022, the employment landscape was tight, marked by a one-to-one ratio of job vacancies to unemployed workers and two-thirds of businesses struggling to recruit, ING said.

Influx of economic migration

This tight market was subsequently altered by a massive influx of economic migration. 

From late 2019 to late 2024, the number of non-EU nationals employed in Britain effectively doubled. 

This occurred even as the number of workers from the European Union decreased, and only 24,000 additional UK nationals entered the workforce. 

Notably, the proportion of non-EU workers in lower-wage sectors like hospitality and health/social care jumped from 10% to 20%.

“The result is that unfilled job openings are down sharply – and more so than in other developed economies,” James Smith, developed markets economist, UK, at ING Group, said in the report. 

The ratio of job openings to unemployed workers has fallen below pre-Covid levels, with only four vacancies available for every ten workers seeking employment, according to Smith.

Redundancies tentatively appear to be rising, and unusually, more companies are closing than opening.

Unemployment is increasing, data quality issues notwithstanding.

Fears of inflation surge overstated

The current situation is significant for two reasons.

Firstly, falling wage growth from 6% in January to 3.9% in October last year, potentially reaching 3%, suggests real disposable incomes will likely flatline. 

Secondly, fears of another inflation surge are overstated. Unlike 2022, workers and companies now lack the power to secure higher wages or prices in response to rising costs. 

While food prices spiked, ING does not expect the sustained inflation seen previously. 

Furthermore, food inflation is already beginning to fall, a trend supported by data from Western Europe and the falling UN gauge of food input prices.

BoE remains cautious

The recent weakness in GDP figures is another relevant factor. 

The UK economy expanded by only 0.1% in the third quarter and is projected to be flat in the fourth quarter, although this might exaggerate the actual degree of weakness. 

Since 2022, GDP data have consistently shown a stronger performance in the first half of the year compared to the second, suggesting a potential issue with the seasonal adjustment methodology.

“Listening to all of that, you might be tempted to conclude that the Bank will cut rates again at its next meeting in February,” Smith said. 

That was also our thinking after the data dropped in December. But after a surprisingly hawkish BoE decision last month, that now looks unlikely.

Despite the Bank of England cutting rates last month and hinting at another potential cut, they also delivered a fairly explicit message that subsequent rate cuts might not be imminent.

Governor Bailey of the Bank of England suggested the Bank might “slow the cadence” of interest rate cuts. 

Considering there were no cuts between August and December, this pace was already quite slow.

Market reactions show an April cut is almost fully anticipated, while the likelihood of a March cut is currently seen as 50:50.

A key point of agreement between both “doves” and “hawks” on the Bank of England Monetary Policy Committee was the recent monthly BoE survey of businesses. 

This survey has indicated that expected wage growth is stabilising in the 3.5% to 3.8% range.

Therefore, the release of the next set of results from this critical survey on Thursday will be highly significant.

Next rate cut likely in March

Given the limited amount of new data expected before the early February meeting, it is unlikely to be sufficient to persuade the committee to support another interest rate cut next month, according to the ING report.

Services inflation, a key metric for the Bank, is expected to see a temporary increase in December.

This rise is attributed to the timing of airfare measurements.

By March, however, there will be three more releases of wage growth, which, assuming it continues to prove benign, should be a significant reassurance to the committee, ING said.

“For that reason, we think the Bank will be content with cutting rates again in March, and once more in June,” Smith said. 

At a time when there are near-unprecedented levels of division on the committee, it only takes one or two officials to change their stance to dramatically change the pace of rate cuts.

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