Interest Rate Cuts Likely Despite Rising Wages
Bank of England Signals Further Rate Cuts in 2025
The Bank of England remains on course for interest rate cuts this year despite rising wages and inflation, says Governor Andrew Bailey.
At an economic conference in Brussels, Bailey reiterated the Bank’s trajectory towards additional rate cuts in 2025. Despite unexpected economic fluctuations, the Bank remains committed to this path.
“Pay growth went up, but actually not quite as much as we were expecting,” Bailey stated, addressing concerns that rising wages could hinder the Bank’s ability to cut rates further.
Wage Growth Remains Strong but Below Expectations
Data from the Office for National Statistics (ONS) shows private sector wage growth reached 6.2% in Q4 2024. This marks its highest level since November 2023. While this signals a robust labour market, the figure fell just short of the 6.3% anticipated by Bank of England analysts.
Despite this, the Bank remains confident that wage pressures will ease in the coming months. This reinforces its stance, showing that it can reduce interest rates without stoking inflation unnecessarily.
Interest Rates Lowered, More Cuts Expected
Earlier this month, the Bank of England reduced borrowing costs from 4.75% to 4.5%. Many see this move as the first in a series of cuts to stimulate economic growth.
With concerns mounting over the UK’s economic outlook, pressure is increasing on the Bank to continue this trend. Financial markets currently anticipate at least two more rate reductions before the end of the year.
Future Wage Growth Expected to Decline: Interest Rate Cuts
Bailey pointed to the Bank’s annual survey on wage pressures, conducted through its network of regional agents, as a key indicator of future trends.
He explained that one of the best anchors is the survey conducted by agents around the country every year. They believe settlements will decrease this year.
The Bank’s latest forecasts suggest that annual wage growth will slow to 3.7% in 2025, down from 5.3% in the current year. If this prediction holds, the Bank will have more leeway to continue reducing interest rates without triggering inflationary spikes.
Inflation Set to Rise in the Short Term
Bailey’s remarks come just ahead of the latest inflation figures, which are expected to show an uptick in the headline rate.
City analysts predict that inflation will increase to 2.8%, driven largely by the recovery in service sector prices. The Bank’s own projections indicate that inflation could rise further, reaching 3.7% later in the year, largely due to escalating energy costs.
Balancing Inflation and Growth: Interest Rate Cuts
Rising inflation usually deters rate cuts. However, the Bank of England remains focused on long-term economic stability, not short-term fluctuations.
Bailey suggested that the Bank’s outlook remains largely unchanged by recent data. Policymakers will continue monitoring economic trends before making further decisions.
“I don’t think we saw anything this morning that fundamentally changes that,” he remarked, reinforcing the view that additional rate cuts remain firmly on the agenda.
Markets Expect Further Reductions
Financial markets have priced in multiple rate cuts throughout 2025. Policymakers are navigating the challenge of supporting growth while controlling inflation.
Investors and economists alike will now be closely watching upcoming economic reports, including employment data and consumer spending figures, to gauge how the Bank of England’s next moves may unfold.
Uncertainties remain, but one thing is clear: the Bank of England is committed to lowering borrowing costs. Despite rising wages and inflationary pressures, they aim to stimulate the economy.
