Insights 
VT 
Bank Of England Rate Cut Prospects
The UK’s latest jobs report was mildly dovish, with private sector wage growth falling to 4.4% year-on-year, slightly below expectations. ING’s FX analyst Francesco Pesole notes that in the past three months, the annualised rate has steadied at 2.4%, with forecasts predicting a drop to 3.7% by December, aligning with the Bank of England’s projection.
Public sector pay showed higher growth due to the current fiscal policy, but this is not expected to persist next year. Unemployment has slightly increased, but data quality is improving according to the ONS. The labour market shows a trend of cooling off, with ongoing moderation in wage growth.
The prospect of a November Bank of England rate cut dwindles, though a December cut is more plausible after the Autumn Budget. A February cut remains expected following one more round of inflation and jobs data. Market reaction includes an increase in pricing for a December cut from 7 basis points to 9 basis points, and a 4 basis point drop in 2-year GBP swap rates. The EUR/GBP exchange rate has risen above 0.870, with future gains possibly affected by French political developments.
This morning’s jobs report suggests the UK labor market is finally cooling. Private sector wage growth, a key metric for the Bank of England, has fallen more than expected. This trend, combined with a slight rise in unemployment, points towards easing inflationary pressures in the economy.
We’ve seen this corroborated by other recent data, with the latest CPI inflation figure for September 2025 coming in at 2.1%, just above the Bank’s target. Furthermore, the initial estimate for Q3 GDP showed the economy stagnated with only 0.1% growth. These numbers build a compelling case for the BoE to consider easing its policy from the current 4.0% base rate.
Market Responses And Strategies
This makes positioning for lower interest rates an attractive strategy. With the market pricing only a small chance of a December cut, buying March 2026 SONIA futures could be a way to express this view. We already saw 2-year swap rates drop following this morning’s data, suggesting this trend may have room to run.
A more dovish Bank of England will likely weigh on the pound. We saw EUR/GBP immediately rally above 0.870 on the news. Traders could look at buying GBP put options to protect against, or profit from, further sterling weakness, particularly against the dollar or euro.
However, we must remain cautious, as hot public sector pay remains a concern ahead of the Autumn Budget. The Bank will be wary of cutting rates too soon, remembering the stubborn inflation we battled through in 2023. Any sign of a fiscal giveaway in the budget could delay the first cut well into 2026.
For equity markets, the prospect of lower borrowing costs is a positive. This environment could support UK stock indices over the coming weeks. Using call options on the FTSE 100 offers a way to gain upside exposure while defining risk if the economic cooling turns into a sharper downturn.
