The unemployment rate is reaching its peak and wage growth is slowing down! The Bank of England is ready to cut interest rates this week, but the easing cycle may be coming to an end.

The UK unemployment rate has risen to its highest level in nearly five years, while wage growth has slowed, consolidating market expectations of a rate cut by the Bank of England later this week. Data released by the UK Office for National Statistics on Tuesday showed that the unemployment rate rose to 5.1% in the three months to October, up 0.1 percentage points from the previous value, the highest level since early 2021, in line with economists' expectations. At the same time, the average wage growth excluding bonuses fell slightly from 4.7% to 4.6%, the lowest level since early 2022. Wage growth in the private sector fell below 4% for the first time since 2020. Although these data are slightly higher than expected, November tax data showed a bigger than expected drop of 38,000 in the number of employees on payrolls. UK unemployment rate rises to highest level since 2021 The Bank of England is set to announce its latest interest rate decision on Thursday. Most economists and investors expect the Bank of England to announce a 25 basis points rate cut on Thursday, bringing the base rate to 3.75%. Data indicating economic weakness earlier this month, as well as the latest data released on Tuesday, may prompt the central bank to resume rate cuts after holding steady in September and November. Despite some policymakers remaining concerned about stubborn price pressures, multiple data points indicate that the UK economy has lost momentum, with businesses and consumers preparing for tax increases proposed by Chancellor Rishi Sunak in the budget announced on November 26. Data released on December 3 showed that growth in the UK's service sector slowed in November, employment saw the largest contraction since February, and new orders declined for the first time in four months. Some businesses interviewed stated that the uncertainty surrounding Sunak's upcoming budget announcement had led them to postpone investments in new projects. Interviewed businesses also indicated that weak consumer and business confidence was negatively impacting economic growth. Thomas Pugh, Chief Economist at RSM UK, said: "The rise in the unemployment rate, along with the slowing wage growth in the private sector and upcoming significant deceleration in inflation, lays the foundation for the Bank of England to cut rates on Thursday. However, recent weakness in employment growth is likely partly due to market turmoil sparked by the budget." Following the data release, the pound stabilized against the dollar at $1.3369. The currency market slightly reduced bets on easing monetary policy by the Bank of England, but still expects a 25 basis points rate cut this week, with at least one more rate cut next year. While the market is predicting a rate cut by the Bank of England this week with a probability close to 90%, a survey of economists indicates that the Monetary Policy Committee of the Bank of England is expected to vote in favor of a rate cut by a slim margin of 5 to 4. Bank of England Governor Andrew Bailey may be the key swing voter. He has been hoping to see more evidence of inflation pressures easing before supporting another rate cut. New data to be released tomorrow is expected to show a slight decrease in November's inflation rate to 3.5%. Additionally, the employment report on Tuesday showed that the number of employees on payrolls has decreased by more than 187,000 since the government's first budget announcement; youth unemployment has risen to 13.4%, the highest level in over a year; and the number of unemployed 18 to 24 year-olds in October was close to 550,000, the highest since 2015. The UK labor market has softened this year following Sunak's increase in labor costs in his first budget. While last month's budget avoided significant tax hikes, businesses are still facing prospects of the minimum wage increase next year and strengthened employment rights. Liz Mckeown, Director of Economic Statistics at the Office for National Statistics, said: "The overall situation continues to show a weakening labor market. The decrease in the number of employees on payrolls reflects subdued hiring activity, and businesses have told us that job openings have decreased recently." Only two rate cuts left? End of Bank of England easing cycle may be near Although the Bank of England is likely to cut rates as planned this week, policymakers may face a tough question whether the easing cycle that has lasted less than a year and a half is nearing its end? Recent calculations cited by Bailey and other indicators suggest that the UK's "neutral rate" level is within reach the rate level that is believed not to stimulate or suppress inflation and the current rate is only one or two rate cuts away from this level. While most members of the Bank of England's Monetary Policy Committee have been hesitant to specify their range for the neutral rate, this concept has quietly become an important consideration. A key divide within the committee is how to balance the UK's stubbornly high inflation levels with the continuously weakening job market. As of October, the UK inflation rate remains as high as 3.6%. Since the start of this easing cycle in August 2024, the opposing forces of these two factors have made it difficult to advance rate cut decisions, and as the policy rate approaches the neutral level, future rate cuts will be more challenging. It is worth noting that the UK's inflation outlook still faces challenges. The fiscal tightening introduced by Sunak in the autumn budget has not resolved inflation stickiness, and may even exacerbate service inflation through cost pass-through. Multiple tax increase measures in the budget such as freezing the employer national insurance threshold, tightening pension contribution tax scheme, and reducing business depreciation allowances will directly or indirectly increase operating costs for businesses. These cost pressures may be passed onto prices of goods and services, especially in the backdrop of the service sector accounting for over 80% of the UK economy, further raising core inflation. Paul Dales, Chief UK Economist at Capital Economics, said: "From now on, the threshold for each rate cut will be significantly raised. Despite serious disagreements among the committee members, I can't help but speculate that the previous near 'inertial' pace of rate cuts may come to an end." Economists Dan Hanson and Ana Andrade said: "The Bank of England removed the 'cautious' wording from its November policy guidance, and we expect little change in the wording of the Monetary Policy Committee's statement in December, maintaining a stance of 'further easing needs to be gradual'. This wording may reflect uncertainty within the committee regarding the neutral rate level the endpoint of this easing cycle. We expect the Monetary Policy Committee to adjust the policy guidance in April next year, announcing a 25 basis points rate cut to bring the base rate to 3.5%. At that time, most policymakers may judge that the Bank of England's policy stance is essentially at a neutral level." Following a survey of economists, it is expected that the Bank of England's base rate will fall to 3.25% in the second half of next year. In contrast, investors are more pessimistic, betting that the final base rate will stabilize around 3.4%. This means that if the Bank of England cuts rates this week as planned, policymakers will only have one more 25 basis points rate cut available further cuts could potentially risk a rebound in inflation.