The Bank of England will need to cut interest rates fast if the jobs market continues to cool, according to its deputy governor.
Sir Dave Ramsden projects that pay increases would average just 2% next year against the backdrop of a slowing economy. This is down from 6.5% in 2023, which in turn would lower borrowing costs to support the economy.
He also warned that Rachel Reeves’s Budget tax raid had introduced “uncertainty to the outlook for the labour market and wider economy”, with potential consequences for jobs, wages and prices across the economy.
Sir Dave believes that a “gradual” approach to cutting interest rates by the BoE is the right approach owing to uncertainties, caused in part by Reeves’s Budget tax increases. But if those uncertainties were to diminish and the evidence to point more clearly to further disinflationary pressures, which risked inflation dropping below the 2% target on a sustained basis, then he “would consider a less gradual approach to reducing Bank Rate to be warranted”.
The Bank cut interest rates to 4.75% from 5% this month.
Following the latest inflation data for October, released yesterday, traders now expect just one more rate cut by March, instead of two more ahead of Reeves’s Spring Budget.
But Sir Dave said there was already evidence the jobs market was cooling.
“My starting point, based on my assessment of the disinflationary process, is to consider it more likely that pay awards will be in the bottom half of the expected 2-4% range than in the top half.”
He also said higher-than-expected inflation in October did not affect his prediction that the British economy will continue to cool next year.
“A very small miss in one month… doesn’t affect my assessment,” he told an audience in Leeds.
