BoE preview: A pause despite further easing in pay growth

UK pay growth continued to cool in the three months to July (5.1% from 5.4% in Q2) . At the same time, employment jumped more than expected by consensus (+265k over a quarter) and the unemployment rate edged slightly lower to 4.1% . While the ONS reiterated that the Labour Force Survey data is no longer accurate , there is no certainty that the labour market has been loosening sufficiently rapidly to accelerate the rate cutting cycle. The services inflation decelerated to 5.2% in July from 5.7% in June, marking the lowest level since June 2022 and falling below the BoE’s forecast of 5.6%. Meanwhile, core inflation slowed to 3.3% in July, the lowest level since September 2021, after 3.5% in the preceding two months. All that suggests that the BoE will continue its easing cycle. Yet, we expect the MPC to cut at a more gradual pace with the next rate cut in November. BoE governor Andrew Bailey saw the second-round inflation effects to be smaller than anticipated , but he stressed that it was “too early to declare victory”. Although services inflation and pay growth came in lower than previously expected by the BoE, w e still think that th e MPC will keep interest rates unchanged on September 19 and cut more pronouncedly in November if needed. The MPC split should be 7 to 2 members favoring unchanged policy, with two dissenting and voting to cut the Bank Rate by 25bp. T he continued moderation in pay growth and a further drop in vacancies point to a gradual labour market slowdown , which will support disinflationary pressures ahead. So, the BoE will continue its easing cycle next year cutting four more times.