Market News
Interest rates will fall to 2.75pc amid unemployment crisis
The Bank of England will slash interest rates to their lowest level in more than three years as Britain battles an unemployment crisis, a Swiss lender has claimed.
Rates will fall from the present level of 3.75pc to 2.75pc after the summer, according to Lombard Odier. The figure would be the Bank Rate’s lowest point since November 2022, coming close to the Bank’s target of 2pc.
Such a drastic cut would benefit homeowners and businesses, who could borrow more to invest, and would be driven by ructions in the employment market.
Bill Papadakis, from Lombard Odier, said policymakers would be forced to act because of a “collapse in job vacancies to below pre-pandemic levels and a rising unemployment rate”.
He added: “Strong wage growth has already slowed meaningfully as the employment picture has weakened.”
“Together with falling services inflation, this should translate into lower price pressures, allowing the Bank of England to cut rates to 2.75pc by the end of the third quarter – a level close to neutral.”
The jobs market has been worsening, with unemployment standing above 5pc in the three months to October, according to the Office for National Statistics (ONS).
Meanwhile, private sector pay growth slumped to 3.9pc in the three months to October, its weakest level since early 2021.
Vacancy numbers ticked up slightly in the three months to November to 729,000, from 723,000 in the previous period, the ONS said. However, job openings have slumped from a peak of 1.3 million between March and May 2022. The figure stood at 795,000 in the three months to March 2020, the period covering the start of the Covid pandemic.
Mr Papadakis said rapid rate cuts “should support the economy in an otherwise tough period”.
“For businesses, lower interest rates could provide some support to investment in 2026,” he said.
A Bank Rate of 2.75pc would be close to “neutral” – the level where the economy is growing at full capacity but not pumping up inflation, he said.
Budget ‘will hurt growth’
A weakening in the jobs market is usually considered a green light for central banks to lower interest rates to help boost the economy.
However, money markets indicate the Bank of England will only lower interest rates to 3.5pc next year, likely by June.
Rob Wood, chief UK economist at Pantheon Macroeconomics, said there was “little reason” for Threadneedle Street to speed up rate cuts in 2026.
He warned that the Chancellor’s measures in the 2025 Budget, such as fuel duty increases and additional pay-per-mile charges on electric vehicles, would “lift inflation slightly in 2027 and 2028”.
“The market has taken a similar view,” he said.
However, other economists agree with Lombard Odier that the Bank will cut interest rates faster than traders expect.
Capital Economics forecasts a reduction to 3pc next year. Paul Dales, its chief UK economist, warned that the Budget “will drag on GDP growth, add to the downward pressure on inflation and mean interest rates may fall further than widely expected”.
Deutsche Bank expects two more rate reductions to 3.25pc in March and June.
Sanjay Raja, its UK chief economist, acknowledged that a rise in unemployment from 5pc to 5.3pc in the next two sets of ONS data “could elicit some genuine concerns” and force the Bank into stronger action.
He said: “Big picture, the case for faster rate cuts has not crystallised – not yet at least.
“Should the above conditions come to fruition, we think the case for faster and deeper rate cuts will strengthen.”
He added: “Ultimately, however, the case for faster rate cuts will rest on the evolution of the labour market.”
