In July, UK employers provided the lowest pay settlements since late 2021, with a further slowdown in hiring. Surveys indicated very weak wages for new hires during this period.
Median wage awards decreased to 3% in the three months leading to July, down from 3.4% in June. Only 9% of firms offered wage increases of 4% or more, a drop from the previous 39%.
Slow Growth in Starting Salaries
Recruiters revealed that starting salaries for permanent positions rose at their slowest rate in four-and-a-half years. Meanwhile, candidate availability increased to its highest level since 2020 due to redundancies and job security concerns.
The softened pay landscape may reduce inflation worries for the Bank of England. However, employers remain cautious as they anticipate Chancellor Rachel Reeves’ November budget, with potential tax increases looming.
Given the new data showing slowing pay and hiring, we believe the Bank of England has more justification to consider cutting interest rates. The fall in median wage awards to 3% is a strong signal that inflationary pressures from the labour market are easing. This pivot makes derivatives linked to UK interest rates, such as SONIA futures, a key focus for positioning for a more dovish policy ahead.
This view is strengthened by the most recent inflation figures released in late August 2025, which showed the UK’s Consumer Prices Index (CPI) had fallen to 2.1%, just above the Bank’s target. This marks a significant drop from the 3.9% rate we saw at the end of 2023, reinforcing the case for policy easing. Historically, when wage growth has decelerated this sharply alongside falling inflation, the central bank has acted by lowering borrowing costs within the following six months.
Impact on the Pound and Equity Market
The expectation of lower interest rates is likely to place downward pressure on the pound sterling. We anticipate that currency markets will begin pricing in a rate cut before it happens, potentially weakening GBP against the US dollar and the euro. Consequently, we are evaluating put options on GBP/USD to capitalise on this expected decline in the coming weeks.
For the UK equity market, the outlook is more complex, as the fear of tax hikes in the November budget creates a headwind. This caution among employers could translate to lower corporate investment and earnings, capping any rally in the FTSE 250. We are therefore considering protective strategies, such as buying put options on UK stock indices to hedge against potential market weakness leading up to the Chancellor’s announcement.
The combination of economic slowing and political uncertainty around the budget is likely to increase market volatility. The spread between the expected and actual policy from both the Bank of England and the government creates trading opportunities. This environment makes strategies that profit from price swings, like long straddles on the FTSE 100, an appealing option for the weeks ahead.
