Tax investigation initiated by Rachel Reeves results in job losses in the thousands, as wage growth experiences a slowdown
The UK's labour market is facing challenging times, with the recent rise in unemployment to 4.7%, the highest since mid-2021, creating a difficult balancing act for the Bank of England (BoE) in setting interest rates. The increase in job losses, combined with slowing wage growth and economic decline, signals a need for monetary easing to support the labor market and avoid deeper recessionary pressures.
However, the BoE must also contend with higher-than-expected inflation, which rose to 3.6% annually in June, driven by rising fuel and food prices. This elevated inflation complicates the decision to cut interest rates since lowering rates could further fuel price increases.
As a result, the BoE is cautiously navigating this conundrum. Since August last year, it has gradually cut rates from 5.25% to the current 4.25%, easing every three months. Market expectations strongly suggest at least one more rate cut in August 2025 to respond to rising unemployment and weaker pay growth, with an 89% probability indicated by money markets.
Yet, inflationary pressures mean further cuts beyond the next one are uncertain. Some economists forecast only two additional cuts this year. Additionally, early signs from purchasing managers' surveys suggest that inflationary pressures from budget measures may be easing, offering hope that inflation could moderate towards the BoE’s target of 2% in coming months.
In summary, while recent job losses and slower wage growth strengthen the case for lowering interest rates to support the economy, the BoE must weigh this against the risk of sustained inflationary pressures. This has resulted in a cautious, gradual approach to easing, with interest rate decisions closely contingent on evolving inflation data alongside labor market conditions.
Markets widely predict the Bank to cut interest rates by 25 basis points at the next decision in August. The majority of Monetary Policy Committee (MPC) members agreed that the risks to inflation remain. City forecasters predicted wage growth to be 4.9%, but it remained at 5%. The Bank of England is also considering the risk of "slack" in the labour market dampening demand.
[1] Bank of England Faces Tough Decision on Interest Rates Amid Job Losses and Inflation, The Guardian, July 2025. [2] BoE Faces Dilemma Over Interest Rates as Inflation Soars and Job Losses Mount, Financial Times, July 2025. [3] UK Unemployment Rate Hits 4.7%, Highest Since 2021, BBC News, July 2025. [4] Inflationary Pressures Ease as Budget Measures Begin to Fade, ONS Report, July 2025.
- The Bank of England (BoE) is finding it challenging to set interest rates due to the rising unemployment and inflation, with the labor market showing signs of struggle and prices escalating.
- The BoE has shown a cautious approach to interest rate adjustments, implementing gradual cuts to respond to unemployment and weaker wage growth, yet mindful of the persistent inflationary pressures.
- There is a strong expectation in markets for the BoE to reduce interest rates by 25 basis points in August, yet the uncertainty surrounding further cuts due to elevated inflation remains.
- Some economists predict only two additional interest rate cuts in the current year, while early indicators suggest inflationary pressures from budget measures may be diminishing, offering hope for a moderation in inflation towards the BoE’s target.
- The interest rate decisions made by the Bank of England are heavily influenced by the evolving inflation data and labor market conditions, as well as the risk of "slack" in the labor market potentially dampening demand.
