Bank of England Rate Cut Prospects

The latest jobs report from the UK shows some signs of a slowdown. Private sector wage growth has dropped to 4.4% year-on-year, which is slightly below what experts expected. According to ING’s FX analyst Francesco Pesole, the annualized wage growth has stabilized at 2.4% over the last three months. Predictions indicate it could fall to 3.7% by December, matching the Bank of England’s expectations. Public sector pay has seen higher growth due to current fiscal policies, but this trend is unlikely to continue next year. Unemployment has ticked up slightly, but the quality of data is improving, according to the ONS. Overall, the labor market appears to be cooling, with wage growth continuing to moderate. The chance of a rate cut by the Bank of England in November is diminishing, but a cut in December seems more likely after the Autumn Budget. Analysts expect a cut in February after one more round of inflation and jobs data. Market reactions include an increase in the probability of a December cut from 7 basis points to 9 basis points and a 4 basis point drop in 2-year GBP swap rates. The EUR/GBP exchange rate has risen above 0.870, which may be impacted by political events in France. Today’s jobs report indicates that the UK labor market is finally cooling off. Private sector wage growth, which is crucial for the Bank of England, has declined more than anticipated. This decrease, along with a slight rise in unemployment, suggests that inflationary pressures in the economy are easing. Supporting this trend are recent data points. The latest Consumer Price Index (CPI) inflation figure for September 2025 is at 2.1%, just above the Bank’s target. Additionally, the initial estimate for Q3 GDP shows the economy stagnated, growing only 0.1%. These figures provide solid evidence for the Bank of England to consider lowering the current base rate of 4.0%.

Market Responses and Strategies

Given this context, betting on lower interest rates seems like a smart strategy. Currently, the market suggests only a small chance of a December rate cut, so buying March 2026 SONIA futures may be a way to leverage this outlook. We have already seen a drop in 2-year swap rates following today’s data, indicating that this downward trend could have more potential. A more dovish stance from the Bank of England may negatively affect the pound. We saw EUR/GBP quickly rise above 0.870 after the news. Traders might consider buying GBP put options to hedge against or profit from potential further decline in the pound, especially against the dollar or euro. However, caution is necessary. Rising public sector pay is still a concern as we approach the Autumn Budget. The Bank of England may be reluctant to cut rates too quickly, remembering the persistent inflation faced in 2023. Any indication of increased fiscal spending in the budget could postpone the first rate cut well into 2026. For equity markets, the prospect of lower borrowing costs is encouraging. This environment could support UK stock indices in the coming weeks. Using call options on the FTSE 100 can provide an opportunity for upside exposure while managing risk if the economic slowdown worsens. Create your live VT Markets account and start trading now.

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