UK Jobs Data Sparks Rate Cut Expectations as Pound Falls

Markets in the United Kingdom reacted swiftly to a new batch of labor data released on July 14, as signs of cooling wage growth and reduced hiring momentum fueled expectations of a Bank of England rate cut. Governor Andrew Bailey hinted in a speech that the central bank is closely monitoring the employment market, and that softening conditions could open the door for monetary easing. The British pound slid to a three-week low against the U.S. dollar, while government bond yields dropped amid rising speculation that interest rates could be cut as soon as the next Monetary Policy Committee meeting in August.

Traders interpreted Bailey’s comments as a shift in the Bank’s forward guidance, with a stronger emphasis now being placed on domestic economic slack rather than persistent inflation. Although inflation remains slightly above the target range, the moderation in wage pressures and falling job openings have raised concerns that restrictive monetary policy could further damage growth. Businesses have already begun scaling back hiring plans, and consumer sentiment surveys suggest caution around future spending. These indicators collectively point to a decelerating economy that may need stimulus sooner than previously expected.

As the labor market weakens, economists are recalibrating their forecasts. Some now expect up to two rate cuts before the end of the year, provided inflation remains under control. The Bank of England has so far held rates at multi-year highs in an effort to curb post-pandemic price surges and energy-driven inflation. But with inflation showing signs of plateauing and core components easing, pressure is mounting for the central bank to pivot toward supporting growth. The markets have priced in an 88% probability of a cut at the upcoming meeting, a sharp jump from just two weeks ago.

Financial markets have also reacted to the broader geopolitical backdrop, including heightened trade tensions stemming from new U.S. tariffs on European imports. These developments have added another layer of complexity to the Bank’s policy calculus, as global trade instability may weigh on the UK’s already fragile export environment. Investors now await further economic reports, including retail sales and inflation figures, to confirm whether the shift in sentiment is supported by a broader economic slowdown.

In the meantime, the weakening pound is drawing mixed reactions. While it could provide a short-term boost to exporters, it also risks exacerbating imported inflation, complicating the central bank’s outlook. As monetary policy expectations shift rapidly, the Bank of England will face a delicate balancing act: supporting growth without reigniting inflationary pressures.