Leading Indicators | Balancing act: BoE navigates inflation risks and labour market softness

BoE cuts rates but projects slower inflation path to target

Last week, the BoE lowered interest rates by a quarter point to 4% in a narrow 5-4 decision. Despite the cut, the Bank’s latest projections point to a higher inflation peak of 4.0% in September, up from its previous forecast of 3.7%, and returning to the 2% target only by Q2 2027 - a quarter later than previously expected. The MPC reiterated its guidance for a ‘gradual and careful’ approach to further easing, and markets now price a 75% chance of another cut this year, down from over 90% before the decision.

Cooling jobs market may bolster case for November rate cut – if wage growth eases

The latest UK labour market data signalled further cooling, with unemployment steady at 4.7% and vacancies falling to their lowest since early 2021. Regular pay growth held at 5% in the three months to June, underscoring sticky inflation pressures despite softer hiring demand. The mix of weakening labour demand and persistent wage growth keeps the BoE on track for a November rate cut, though any further easing will depend on faster wage moderation.

UK tariff exposure holds steady at 10% despite US policy swings 

Since ‘Liberation Day’ on April 2nd, US tariff policies have shifted considerably. The UK was among the countries to secure an early agreement with the US, avoiding the most punitive reciprocal tariffs while the 10% baseline levy remained. This has left the UK relatively insulated, with reduced tariff uncertainty potentially supporting investor confidence and trade stability.