Despite cooling labour market, some economists say rate cut more likely in September than August
Even though wage growth is cooling, some economists believe the Bank of England’s first rate cut is more likely to come in September rather than August.
Ashley Webb, UK economist at the consultancy Capital Economics, said the slowdown in the jobs market probably wasn’t enough to offset strength in services inflation.
As a result, we have changed our forecast for the timing of the first interest rate cut from 5.25% from August to September, although it is a close call.
But we think the cumulative effect of weak GDP growth last year and some improvement in supply this year will mean that services inflation falls from 5.7% in June to 3.5% in early 2025 and wage growth slows to 3% by the end of next year. That’s why we still expect rates to fall to 3% by the end of 2025 instead of 4% as investors expect.
Rate setters will breathe a sigh of relief after today’s labour market data, which leaves open the option to cut in August despite hot CPI services inflation. Rate setters will be encouraged by softer private sector pay growth in May, suggesting only small upside risks to their forecast for Q2 pay growth.
We think an August rate cut is a very close call. The MPC could easily dismiss yesterday’s stronger-than-expected CPI services reading as volatile, just as they did in June, note slowing wage growth, and plough on with a rate cut in August. But we think services inflation is just too hot for the MPC to go ahead in August, and instead expect them to wait until September to reduce interest rates.
