The Bank of England is set to slash interest rates to their lowest level in more than three years as a jobs crisis forces policymakers into drastic action, a leading Swiss lender has warned.
The base rate could tumble from the current 3.75% to just 2.75% after the summer as unemployment rises and wage growth cools sharply, according to Lombard Odier.
Such a move would mark the Bank Rate’s lowest level since November 2022 and deliver major relief to mortgage holders and hard-pressed businesses struggling with higher borrowing costs.
The dramatic shift would be driven by what economists describe as a worrying deterioration in the labour market.
Bill Papadakis, at Lombard Odier, said the Bank would be left with little choice as signs of strain multiply.
He warned policymakers were facing a “collapse in job vacancies to below pre-pandemic levels and a rising unemployment rate”.
“Strong wage growth has already slowed meaningfully as the employment picture has weakened,” he said.
“Together with falling services inflation, this should translate into lower price pressures, allowing the Bank of England to cut rates to 2.75% by the end of the third quarter – a level close to neutral.”
Official figures underline the growing concern. Unemployment has climbed above 5% in the three months to October, according to the Office for National Statistics.
At the same time, private-sector pay growth slumped to 3.9% over the same period – its weakest level since early 2021.
Vacancies edged up slightly to 729,000 in the three months to November, from 723,000 previously. But that remains a far cry from the peak of 1.3 million seen in spring 2022 and well below the 795,000 recorded at the start of the Covid pandemic.
Mr Papadakis said rapid rate cuts “should support the economy in an otherwise tough period”.
“For businesses, lower interest rates could provide some support to investment in 2026,” he said.
A Bank Rate of 2.75% would be close to “neutral” – the point at which the economy is neither overheating nor stalling – suggesting Threadneedle Street may have to abandon its caution to prevent a sharper slowdown.
A weakening jobs market is usually seen as a green light for central banks to loosen policy. Yet financial markets remain sceptical, pricing in cuts only to around 3.5% next year, possibly by June.
Rob Wood, chief UK economist at Pantheon Macroeconomics, said there was “little reason” for the Bank to accelerate rate cuts in 2026.
He also warned that measures announced by the Chancellor in the 2025 Budget – including fuel duty rises and new pay-per-mile charges on electric vehicles – would “lift inflation slightly in 2027 and 2028”.
“The market has taken a similar view,” he said.
Others disagree. Capital Economics expects rates to fall to 3% next year. Its chief UK economist, Paul Dales, said the Budget “will drag on GDP growth, add to the downward pressure on inflation and mean interest rates may fall further than widely expected”.
Deutsche Bank predicts two further cuts to 3.25% by March and June. Its UK chief economist, Sanjay Raja, said a rise in unemployment from 5% to 5.3% in the next two ONS releases “could elicit some genuine concerns” and push the Bank into stronger action.
“Big picture, the case for faster rate cuts has not crystallised – not yet at least,” he said.
“Should the above conditions come to fruition, we think the case for faster and deeper rate cuts will strengthen. Ultimately, however, the case for faster rate cuts will rest on the evolution of the labour market.”