Borrowing costs are set to ease further as the Bank of England grapples with stagnant growth and rising unemployment. Most economists predict the Bank's Monetary Policy Committee (MPC) will cut interest rates by 0.25 percentage points to 4% on Thursday.
The potential rate cut could release pressure for mortgage holders amid hopes that cheaper deals will enter the market. Interest rates have been steadily reduced over the past year from a peak of 5.25%.
Unemployment reaches four-year high
Official data from the Office for National Statistics (ONS) showed UK unemployment increased to 4.7% in the three months to May - the highest level for four years. Average earnings growth, excluding bonuses, slowed to 5% in the period to May, reaching its lowest level for almost three years.
Bank of England Governor Andrew Bailey said earlier this month that the Bank would be prepared to cut rates if the jobs market showed signs of weakening. ONS data also revealed the UK economy contracted in both April and May, further pressuring policymakers to ease borrowing costs.
Economists predict rate cut
Andrew Goodwin, chief UK economist for Oxford Economics, said it would be a "major surprise" if the MPC does not cut interest rates on Thursday. "With pay growth continuing to cool and Bank rate still well above the level that most committee members would consider to be neutral, it would be a major surprise if the MPC didn't cut Bank rate by another 0.25 percentage points on August 7," he said.
However, Goodwin said it is unlikely the committee will speed up its pace of interest rate cuts over the rest of 2025. Signs of a slower pace of job losses "significantly reduce the urgency of the situation".
Inflation concerns remain
Some policymakers may be more concerned by recent inflation data, with prices rising at the fastest rate in 15 months in June. Rising food inflation has put pressure on the overall rate in recent months.
Jack Meaning, an analyst for Barclays UK, said he was expecting rates to be cut to 4% but that there was likely to be a "three-way vote split" amongst the nine-person MPC. He cited "different interpretations of the recent flow of data" as the reason for potential disagreement.
Committee split expected
Meaning predicts two members voting to keep the level at 4.25%, and another two opting for a larger 0.5 percentage point cut. He said a "lack of smoking gun" in relation to recent data could motivate committee members "in the middle ground to remain gradual, careful and non-committal" in relation to rate cuts.
(PA/London) Note: This article has been edited with the help of Artificial Intelligence.
