What’s Behind the December Rate-Cut Bets
- Soft Labour Market Report
- The UK’s unemployment rate rose to 5.0%, up from 4.8%. (Investing.com)
- Regular pay growth (excluding bonuses) slowed to 4.6%, the weakest since early 2022. (Investing.com)
- In the private sector specifically, wage growth is cooling more sharply. (Investing.com)
- Payrolls (i.e. number of people on company books) have declined, and redundancies are increasing — another sign of labour-market slack. (Proactive Investors)
- Market Reaction
- Following the weak labour data, rate futures markets sharply increased their expectations for a 25 bps cut in December. (Investing.com)
- According to StoneX, the probability priced in by markets for a December cut has climbed to around 80%. (StoneX)
- The British pound weakened against the dollar as a result. (Trading Economics)
- Signals from the Bank of England
- Although the BoE held rates at 4% at its recent meeting, its forward guidance has shifted slightly: the MPC said “if progress on disinflation continues, Bank Rate is likely to continue on a gradual downward path.” (Reuters)
- In the same meeting, the vote was narrow (5–4) to hold — suggesting that some members are ready to ease soon. (The Guardian)
- Economists like Deutsche Bank’s Sanjay Raja argue that markets may be “underpricing” the chance of a December cut. (Proactive Investors)
- Goldman’s analysis also points to a more aggressive easing path than previously expected, especially if inflation continues to moderate. (Goldman Sachs)
- Inflation Context
- Inflation remains elevated at ~3.8%, but recent data show it may be peaking. (The Guardian)
- Softer inflation provides the BoE more room to cut without immediately risking a flare-up. (London South East)
Risks & Counterarguments
- Persistence of Inflation: Even though inflation may be peaking, it’s still well above the BoE’s 2% target. Some MPC members might remain cautious about cutting too fast. (Goldman Sachs)
- Fiscal Uncertainty: The upcoming Budget adds risk — depending on the government’s stance (tax increases, spending), it could change the BoE’s calculus. (The Guardian)
- Data Volatility: Labour and wage data can be volatile and subject to revision. If future data surprises on the upside, markets might pull back their bets.
- Credibility & Timing: Cutting too aggressively too soon could undermine the BoE’s credibility if inflation doesn’t continue to fall.
Analyst & Market Commentary
- StoneX (Fiona Cincotta) argues that the weak labour report gives strong justification for a cut: “markets are increasingly convinced the Bank of England will deliver a rate cut before year end.” (StoneX)
- Deutsche Bank: Their chief UK economist believes the December cut is underpriced. (Proactive Investors)
- Goldman Sachs: Their research suggests that if disinflation continues, the BoE could cut more than markets expect. (Goldman Sachs)
- ICAEW’s Suren Thiru (via The Guardian) warns that weaker labour-market momentum could push the BoE to move sooner rather than later. (The Guardian)
Implications if the BoE Cuts in December
- Gilt Yields: Could compress further as markets adjust to a more dovish rate path.
- Sterling (GBP): Likely to weaken more if the cut is viewed as a signal of a softening UK economy.
- Households & Borrowers: Lower rates could ease mortgage costs, helping consumer spending in the near term.
- Business Investment: Cheaper borrowing could support capex, but only if confidence improves.
- Inflation Trajectory: A cut might give some boost to demand, but if inflation is still sticky, the BoE could risk reversing itself later.
Bottom Line: The latest labour data (higher unemployment, slower wages) have significantly increased market conviction that the BoE will cut rates in December. That said, the BoE must balance the easing case with the risk that inflation doesn’t fall as fast as markets hope.
Good call. Here’s a breakdown of case studies, market reactions, and commentary around the rising bets on a December BoE rate cut following weak UK labour-market data.
Key Developments & Case Studies
- Labour Market Weakness — The Trigger
- The unemployment rate rose to 5.0%, above consensus expectations. (Investing.com)
- Regular pay growth (excluding bonuses) slowed to 4.6%, its weakest in some time. (Investing.com)
- Employment fell: one report says employment dropped by 22,000 in the quarter. (Investing.com)
- Payroll data is weak: payrolled employment continues to decline. (MarketScreener UK)
- Market Reaction
- Gilt (UK government bond) yields, especially at the short end, dropped sharply. (IG)
- According to IG, markets now price in >80% probability of a December rate cut. (IG)
- The British pound weakened after the data, reflecting growing conviction of easing. (Trading Economics)
- According to MoneyToTheMasses, weak GDP (0.1% growth in Q3) plus the labour data make a December cut “almost a certainty” in some analysts’ views. (Money To The Masses)
- Bank of England Viewpoint & Risks
- In its November Monetary Policy Report, the BoE noted labour-market easing: job vacancies have fallen, and its vacancy/unemployment (V/U) ratio is now below what it estimates as equilibrium. (Bank of England)
- The BoE sees “risks of a sharper rise in unemployment”: its own modeling suggests unemployment could hit ~5.5% in 2026 if slack continues to build. (Bank of England)
- But the BoE also warns that rising employment costs (e.g., higher employer national insurance contributions, or NICs) make firms more vulnerable: if demand weakens, firms may lay off workers to manage costs. (Bank of England)
- Analyst & Economist Commentary
- Deutsche Bank: Sanjay Raja (chief UK economist) argues the labour-market data strengthens the case for a rate cut: “today’s data should give the MPC more confidence to cut Bank Rate further by year-end.” (Proactive Investors)
- EY ITEM Club: Their chief economic advisor, Matt Swannell, says that cooling pay momentum and loosening labour conditions support easing. (Proactive Investors)
- ING: Analysts note the jobs number isn’t “screamingly dovish,” but supports the current repricing of BoE rate expectations. (MarketScreener UK)
- JP Morgan / Global Asset Management: Zara Nokes warns the BoE is in a tough spot: the labour market is “clearly deteriorating,” but inflation remains elevated, making policy decisions difficult. (mint)
Implications & Risks Going Forward
- Monetary Policy: A December cut could be imminent if the data trend continues. But the BoE may want to be cautious: cutting too far or too fast risks giving up control of inflation, especially if price pressures re-accelerate.
- Market Expectations: If markets are overly aggressive in pricing in cuts, there’s a risk of a sharp re-pricing if upcoming data surprises (e.g., inflation, GDP) don’t support further easing.
- Labour Market Slack: The BoE’s own models suggest more slack could emerge, which would justify more easing — but that also depends on how much employment declines continue and how economic demand evolves.
- Budget Risk: The upcoming UK Budget could materially influence BoE’s decisions. If the government pushes expansionary fiscal policy, it might complicate the BoE’s decision to cut (or how much to cut).
Bottom Line: The weak labour market data — rising unemployment, slowing pay growth, falling payrolls — has significantly strengthened market bets on a December BoE rate cut. Several major analysts agree, though policymakers face a delicate balance between supporting growth and guarding against sticky inflation.