Market News

by  Chris Price

Traders have ramped up bets that the Bank of England will cut interest rates next month after official figures showed unemployment hit a four-year high of 5pc.

Money markets put the probability of a December reduction in borrowing costs at 87pc after the Office for National Statistics warned Britain’s jobs market was “weakening”.

The unemployment rate hit its highest level since 2021 in the three months to September, although outside the pandemic it is at its highest level since 2016. The total number of people seeking work climbed to a five-year high of 1.79m, levels last seen when Britain was in Covid lockdown.

At the same time, pay growth in the public sector soared to a two-year high of 6.6pc, while private sector pay growth slumped to 4.2pc, its weakest since early 2021.

The pound fell and the FTSE 100 hit a new record high as traders increased bets that the Bank of England would cut interest rates to support the jobs market.

Thomas Pugh, chief economist at RSM UK, said the “further slowing in private sector pay growth throws the door wide open to a December rate cut – as long as the Budget is as deflationary as the Chancellor hinted at last week”.

The change in rate expectations sent the cost of short-term government borrowing down to its lowest level in more than a year. The yield on two-year UK gilts – bonds which are sensitive to the outlook for rates – fell by seven basis points to 3.73pc.

Traders also began to favour the chances that the Bank of England will cut rates three times by September next year. They had previously bet on just two more reductions in the Bank Rate, which sits at 4pc.

Wall Street giant JP Morgan said it was now forecasting three cuts in December, March and June, compared to two before the latest jobs figures.

Modupe Adegbembo, an economist at Jefferies, said: “Markets still underestimate the depth of the Bank’s potential easing cycle.”

She added: “Given the weakness in the labour market and the additional fiscal tightening likely to be delivered by the Chancellor, we expect the Bank of England to bring the Bank Rate down to around 3pc.”