The Bank of England is facing renewed pressure just days before its upcoming decision on interest rates.
Fresh data reveals that unemployment has reached its highest level since July 2021, as the lingering effects of the Chancellor’s Autumn Budget continue to burden the UK labour market.
According to figures from the Office for National Statistics, the unemployment rate climbed to 4.6% in the three months leading up to May. At the same time, job vacancies dropped by 63,000, bringing the total to 736,000.
Additionally, payroll numbers experienced their most significant decline since May 2020, highlighting the strain on the jobs market.
These changes come shortly after increases to National Insurance contributions and the National Living Wage took effect.
Despite this, wages continue to rise at a notable pace. Pay excluding bonuses grew by 5.4% year-on-year, which is slightly lower than forecasts but still around 2.1% higher than inflation in real terms.
Inflation itself remains above the Bank’s 2% target, currently sitting at 3.5%. While this is expected to rise in the short term, the Bank of England believes these pressures are likely temporary.
A key concern for policymakers is private sector wage growth. This figure, which the Bank closely monitors, slipped from 5.5% to 5.1%, but still sits well above the level considered consistent with stable inflation.
To add to the economic unease, retail sales growth slowed significantly in May, marking the weakest performance in six months.
These economic indicators create a challenging backdrop for the Bank’s Monetary Policy Committee as they prepare for their next decision.
The Bank must carefully weigh rising inflation against mounting evidence of a softening economy.
Last week, Governor Andrew Bailey acknowledged this growing uncertainty, telling MPs that the path ahead for rate cuts has become much less clear.
He also pointed to international risks, including the impact of global trade tensions—particularly those driven by US President Donald Trump’s tariff policies.
Later this week, the Bank will receive the latest GDP figures, which could further shape its decision-making.
However, for now, forecasts suggest the Bank is likely to keep the base rate unchanged at 4.25%.
Two more base rate cuts tipped for this yearÂ
According to Thomas Pugh, economist at RSM UK, signs are growing that the UK labour market is continuing to lose momentum. He expressed increasing concern over the softening demand for workers across the economy.
Rather than showing signs of stabilising in May, the early data suggests the labour market’s slowdown may have actually gathered pace, highlighting the ongoing challenges faced by employers and job seekers alike.
Pugh noted that while some members of the Monetary Policy Committee (MPC) may want to see further rate cuts, persistent concerns around strong wage growth could hold them back from making another move in June. Nevertheless, he believes the latest labour figures support the idea that the MPC will remain on a slow and steady path when it comes to reducing interest rates.
Current market expectations indicate that the Bank of England is likely to cut rates at least once more before the end of the year. Most investors are pricing in a 25 basis point reduction, bringing the base rate down to 4%. A narrow majority also expect a second cut, which would lower the rate to 3.75%.
Richard Carter, head of fixed interest research at Quilter Cheviot, echoed similar caution, pointing out that although the UK economy is clearly slowing, global risks still loom large. In particular, he mentioned the possible re-escalation of trade tensions in July, once Donald Trump’s 90-day pause on reciprocal tariffs comes to an end.
Carter warned that such developments could easily reignite inflation, despite the weakening domestic outlook. For the Bank of England to consider accelerating its rate cuts, he suggested that the labour market would need to show much more pronounced signs of deterioration.
Download NOW
4 Simple Steps To Becoming Wealthy Through Property