It’s a big week for monetary policy. The European Central Bank (ECB) chose to keep rates on hold at 2% last Thursday and this week it’s the turn of the Bank of England (BoE) and the Federal Reserve (Fed). They’re likely to make different choices, despite facing similar issues.

At its meeting this Wednesday the Fed will almost certainly vote to cut US interest rates by 25 basis points to between 4–4.25%. Our US economics team has the full analysis of why. In short, the US labour market has weakened sharply, with significant downward revisions and a much slower pace of job growth. This shift has outweighed increasing inflation on the back of tariffs.

On this side of the Atlantic, the BoE is facing a similar dilemma. The labour market is loosening, growth is slowing (it stagnated in July) and inflation is rising. Yet, there is currently just a 1% chance that the BoE follows the Fed with a rate cut at its meeting on Thursday. We explain the detail in our MPC preview.

Admittedly, there was never much of a chance the BoE would be cutting rates again this week. That’s because over the last 18 months it’s settled into a pace of cutting at every other meeting. If it continues with this, then November would be the next rate cut. Realistically, it would’ve taken some incredibly dismal economic data recently to convince the Monetary Policy Committee (MPC) to go for back-to-back cuts. However, it now looks like there won’t be any further rate cuts at all this year.

MPC’s hawkish sentiment backed by latest economic data

The minutes of the last MPC meeting had a decidedly hawkish flavour to them. This suggests that most of the MPC’s members are ready to slow the pace of rate cuts, despite the majority voting to cut interest rates in August. The latest data has largely reinforced that hawkish tone.

The economy grew 0.3% in Q2, which was above the BoE’s forecast of 0.1%. Inflation, at 3.8%, matched the MPC’s forecast for July and will probably reach 4% in September. Yet, evidence suggests this is the level at which households really start to pay much more attention to inflation, which risks further de-anchoring inflation expectations.

We also think the labour market has recently shown signs of stabilising, albeit weakly. Indeed, payrolls only fell by 8,000 in July and that estimate is likely to be revised up.

This week’s labour market and inflation data – see our previews below – are likely to reinforce that hawkish tint.

It’ll be very difficult for the MPC to cut interest rates in November if inflation has just reached 4%, like we expect, especially if growth continues to tick along at its average of about 0.1% a month and the labour market stabilises. What’s more, the MPC is unlikely to want to take any action until it knows what will happen in the Autumn Budget, which won’t happen until well after the November MPC meeting.

As a result, we now think the next rate cut will come in February when inflation is back on a downwards path.

But, could there be another rate cut in 2025?

However, another rate cut this year, while increasingly unlikely, isn’t totally off the table. There are two things that could prompt the MPC to cut again before then.

First, despite early signs of stabilisation in the official data, surveys are still pointing to a further weakening in the jobs market. If the official data start to look more like the dismal survey data, then the resulting rise in unemployment and slowdown in pay growth could give the MPC cover for another rate cut.

Second, Chancellor Rachel Reeves looks likely to need to raise upwards of £20bn in taxes at the Autumn Budget. Near-term tax rises would dampen demand and inflationary pressures. This could allow more rate cuts. However, if the Chancellor opts for delayed tax rises or another round of stagflationary measures, such as duties and VAT, then the chances of a rate cut later this year would diminish sharply.

Ultimately, whether the next rate cut comes this year or in 2026, we still think rates will bottom out at 3.5% at some point next year.

When unemployment data is released on Tuesday, we expect the labour market to have loosened further in August. The figures are also likely to show further signs of stabilisation after firms responded to April’s big rise in employment costs by cutting payroll numbers in H1.

When the data is published this week, we think the unemployment rate will hold steady at 4.7% in July, before continuing to rise towards 5% over the rest of the year.

Looking at payrolls, which have painted a much starker picture of employment recently, we expect the preliminary estimate for August to show a small drop of around 7,000, while July’s estimate is likely to be revised up to a gain.

Turning our focus to pay, we think private sector earnings excluding bonuses, which is the measure the Bank of England (BoE) cares most about as it’s more reflective of underlying inflationary pressure, will ease to 4.7% from 4.8%.

Ultimately, it’s hard to get a clear read on the jobs market given the well-documented issues around the Labour Force Survey (LFS) and heavily revised payrolls. However, we think the pace of loosening will slow going forward. Firms are likely to have completed most of their adjustments to payroll tax hikes, which will help the labour market to stabilise.

The risk is that recent weakness accelerates, as implied by most employment surveys, instead of easing from here. Were the labour market to take a turn for the worse, that could prompt the Monetary Policy Committee (MPC) to continue its quarterly rate cutting path, despite the inflation outlook, and opt for a cut in the final quarter of the year.

Our analysis concludes inflation rose to 3.9% in August, up from 3.8% in July, and above the Monetary Policy Committee’s (MPC) forecast of 3.8%.

This would be driven by another rise in food inflation, as higher wholesale agricultural prices continue to make their way to supermarket shelves.

Higher fuel inflation will also likely contribute. Weekly pump prices data suggest these increased 0.4% m/m. This figure will be compounded by base effects from fuel prices that fell sharply this time last year. However, this aspect likely won’t worry the Monetary Policy Committee (MPC) because fuel pump prices should start to fall as OPEC+ (the coalition of 23 oil-producing countries) announced crude oil output rises from October.

Airfares and package holidays both rose strongly in July as the summer holidays ramped up. This should unwind slightly in August to bring services inflation down to 4.8% from 5% previously.

All told, inflation will climb again in August before peaking at 4% in September. We think sticky inflation that’s at almost double the government’s target will prompt the MPC to keep interest rates on hold until next year.

All signs point to August being another positive month for retail sales. We expect a 0.7% m/m gain when the data’s published on Friday.

Continued sunny weather during the school summer holidays likely helped to lift retail spending in August while the UK recorded its hottest summer on record. Indeed, leading indicators such as the British Retail Consortium’s (BRC) measure of retail sales rose to 2.1% y/y in August from 1.6% y/y in July after we deflate and seasonally adjust the data.

Reinforcing this view, consumer confidence rose by 2 points in August to its highest level this year. Consumer confidence overall has been dented by weak sentiment among the over-50s. Yet, retail sales have also tracked more in line with confidence among younger consumers, which has risen strongly of late to now stand at an 8-year high.

Ultimately, we think retail sales will have continued to grow in August, despite consumers’ reluctance to open their wallets in other consumer-facing areas, like hospitality.

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