LONDON: The Bank of England (BoE) believes it has got on top of Britain’s inflation problem. Now it runs the risk of a jobs crisis.
The central bank’s latest forecasts show almost 110,000 more people becoming unemployed than it projected in November, as the current “restrictive” policy stance bears down on the economy.
Alongside its warning that the jobless rate will hit 5.3% by the spring, the BoE slashed its 2026 growth forecast to 0.9% from 1.2%.
But inflation, the challenge the bank has been grappling with for the past four years, finally comes under control.
From 3.4% in December, it expects inflation to drop to around its 2% target by April and stays there for the next three years.
Even with two quarter-point rate cuts in 2026, lowering borrowing costs to 3.25%, the bank believes it has inflation tamed.
Yet last Thursday the Monetary Policy Committee kept rates at 3.75% after a knife-edge 5-4 decision in which governor Andrew Bailey held the swing vote.
Bailey rejected the notion that unemployment is “a price worth paying” to bring down inflation, careful to avoid the sort of language that has landed officials in trouble in the past.
“I want to knock that very firmly on the head,” Bailey said. “We do not welcome unemployment. Let’s be very clear our job is to hit the inflation target.”
For now, Bailey, whose judgment will likely determine when the next rate cut comes, is prioritising inflation risks despite saying his personal “outlook is aligned with the staff’s view of weaker demand.”
Under that scenario, there is a trade-off.
“There is a risk that unemployment continues to rise beyond the near-term peak currently expected,” the bank’s Monetary Policy Report warned.
Younger workers, who are already struggling to find jobs, will be hardest hit and history suggests a controlled increase in unemployment is rare.
“Instead, it tends to be the case that there are turning points where unemployment rises quickly.”
The bank estimates that the United Kingdom’s natural unemployment rate is 4.75%. Anything lower is inflationary, anything higher suggests the economy is not operating at its optimal level.
That implies the cost in lost jobs by early next year will be close to 200,000.
The bank said rising unemployment is mostly coming through a lack of hiring, rather than lay-offs, though official data show redundancies are starting to pick up. — Bloomberg
