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Investing.com - The Bank of England meets next week, and Bank of America sees a risk of a more dovish tilt if the UK labor market deteriorates substantially.
The Bank of England holds its latest policy-setting meeting on Feb. 6, and is widely expected to maintain its key interest rate at 4.75%, with a majority of the nine-member Monetary Policy Committee seen voting for no change.
“We expect a relatively modest easing of the labor market with a 10 bps increase in unemployment rate from 4.4% currently to 4.5% in 2025, slightly higher than our previous forecast of 4.4%,” said analysts at Bank of America, in a note.
Most of the adjustment from higher employment costs will fall on prices and lower wages rather than unemployment, given labor shortages and weak labour supply could make firms reluctant to reduce headcount, the bank added.
“We think wage growth is likely to slow to ~4.0% in 2025. A modest easing of labor market and wage growth would be consistent with a gradual quarterly cutting path by the BoE,” BOA added.
However, this sanguine view is based on the bank’s forecast of a growth and sentiment recovery in 2025 on the back of 1.0% of GDP worth of fiscal easing, real wage growth, reduced drag from monetary policy and potential normalization of the savings rate.
“If growth weakness persists (risks of which are rising from tightening of financial conditions, weak confidence, potential fiscal consolidation, potential tariffs), then a faster than expected slowdown in the labor market cannot be ruled out,” the bank added.
“A sharp sustained slowdown in the labor market and growth would increase risks of a dovish BoE tilt and perhaps faster cuts.”