Bank of England Set to Hold Rates With Eye on UK Jobs Downturn

7vp9mmp(dql}hgncnapb1cg4_media_dl_1.png UK Office for National Statistic

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(Bloomberg) — The Bank of England is expected to keep interest rates on hold at 3.75% this week as policymakers weigh contradictory signs that the economy is both strengthening and losing jobs with unemployment at a near five-year high.

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The Monetary Policy Committee is treading carefully having cut rates from 5.25% since August 2024. Its nine members remain divided over where they will settle — economists estimate the “neutral” rate to be between 3% and 3.5% — but minutes from the last meeting in December showed they have agreed to move more slowly barring an unexpected turn of events. 

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The big unknowns they face are the speed at which inflation will fall to the 2% target from its current level of 3.4%, and whether the recent weakening in the labor market is the start of something more serious. The central bank expects inflation to fall back toward the 2% target next quarter. 

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The new set of economic forecasts published in its quarterly Monetary Policy Report alongside the Feb. 5 rate decision will shine some light on those judgments, with the outlook for wages a key piece of the puzzle. The BOE’s agents survey of business contacts, whose findings on planned pay settlements are closely monitored, will be published at the same time.

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“The labor market is front and center of the current policy debate,” Barclays Plc Chief UK Economist Jack Meaning wrote in a note. 

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Unemployment held at 5.1% in the three months through November, a rate last higher in early 2021. It suggests joblessness ended 2025 above the 5% the BOE predicted in November. At the same time, wage growth is set to undershoot the bank’s forecast for a fourth quarter running, Meaning said.

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Although unemployment is raising concerns, the MPC is expected to hold rates until there is clearer proof inflation is on track for 2% on a sustainable basis. A jump in oil prices after US President Donald Trump threatened strikes on Iran would add 0.2 percentage points to inflation, Capital Economics warned.

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Signs that the economy is picking up after back-to-back tax rises since Labour came to power may also persuade MPC members to downplay employment concerns. 

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Investec economist Philip Shaw said recent data is “unsupportive of a cut this time.” GDP rose by 0.3% in November and the composite purchasing managers index of business activity hit a 21-month high. “Neither points in the direction of spare capacity building up,” Shaw said.

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Barclays and Investec are predicting a 7-2 split on the MPC, with external members Alan Taylor and Swati Dhingra dissenting in favor of cutting rates. Bloomberg Economics and Morgan Stanley see a 6-3 vote with Deputy Governor Dave Ramsden joining the rebels. 

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Traders, who are only fully pricing in one further cut this year, put the chance of move this week at virtually zero and economists agree. December’s quarter-point reduction was a close call, with Governor Andrew Bailey swinging the vote 5-4.

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The decision along with the Monetary Policy Report will be published at noon on Thursday, followed by a press conference led by Bailey. 

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The forecasts are not expected to change much since the last assessment in November.