250,000 jobs evaporated + GDP contracted, the Bank of England faces pressure to cut interest rates

According to Zhitong Finance APP, recent economic data from the UK continues to weaken. Under the dual pressure of tax increases and US trade policies, the Bank of England is facing new challenges for interest rate cuts. This Thursday, the Monetary Policy Committee of the Bank of England will hold a meeting, and the market generally expects the central bank to maintain the benchmark interest rate at 4.25%. However, signals of a policy shift have become increasingly evident.

Figure 1

The latest economic indicators show signs of easing inflationary pressures, which leaves room for policy adjustments. Although last month's inflation rate was unexpectedly revised up to 3.4%, the Bank of England still insists that inflation will return to the 2% target by 2027. It is worth noting that the tense situation in the Middle East has led to a 13% surge in international oil prices in a single day, which may disrupt future inflation trends. Market pricing has fully reflected the expectations of an interest rate cut in August, with traders believing that the probability of a rate cut has surged from 40% at the beginning of the month to 80%, and expectations for two rate cuts before the end of the year have been completely digested.

Labor market data has become a key driver for the policy shift. In May, employment numbers saw the largest monthly decline in five years, indicating that the UK economy has lost over 250,000 jobs since the Labour government announced increases in employer payroll taxes and minimum wage standards. The pace of wage growth has also slowed more than expected, but it remains well above the 3% level consistent with the target inflation rate.

Figure 2

The £26 billion payroll tax increase policy implemented by Chancellor of the Exchequer Reeves is showing effects, with layoffs and salary cuts spreading among businesses, directly weakening the Bank of England's concerns about a wage-price spiral. Former Monetary Policy Committee member Saunders stated that the weak employment data makes an interest rate hike in August "highly likely."

Economic growth is also showing signs of fatigue. GDP data released on Thursday indicated that the UK economy experienced the largest monthly contraction in a year and a half, attributed to the implementation of tax increases. Businesses are also facing the impact of Trump tariffs, with UK exports to the US experiencing a historic decline in April, leading to economic contraction.

In terms of policy dynamics, there are clear divisions within the Bank of England. Hawkish members represented by Taylor and Dingra may continue to oppose interest rate cuts, while Deputy Governor Briden may shift to the dovish camp. Morgan Stanley's chief economist Scarlata expects the meeting minutes to reflect a 6:3 voting pattern, with the Bank of England likely to emphasize phrases such as "economic stagnation, weak employment, and easing core inflation" to pave the way for subsequent policy easing. This dovish tendency has already been reflected in the bond market, with the yield on two-year UK bonds falling by 14 basis points in a week to 3.88%, leading among major developed countries' bond markets It is worth noting that this interest rate meeting coincides with a critical turning point in the UK economy. The minutes from the May meeting showed that members, including Bailey, were cautious about interest rate cuts at that time, but ultimately passed the decision to cut rates by 25 basis points by a narrow margin. Now, with more economic data being released, the focus of the Bank of England's policy is shifting from combating inflation to preventing recession. HSBC economist Martins pointed out that if the labor market continues to deteriorate in August, the decision to cut rates will gain stronger support, while the April GDP data has shattered the optimistic expectations brought by strong growth in the first quarter.

In this policy shift game, the expectation gap between the market and the Bank of England is narrowing. Although overall inflation remains high, signals such as easing core inflation, slowing wage growth, and weak consumption are pushing the policy balance towards easing. The release of inflation data and the Bank of England's policy statement in the coming week will become important indicators for observing the direction of the UK economy