The UK Labour Market Slowdown: A Bull Case for GILTS Amid BoE Rate Cut Expectations

The UK labour market is undergoing a notable slowdown, with weakening wage growth, plummeting job vacancies, and structural shifts driven by AI reshaping employment dynamics. These trends suggest the Bank of England (BoE) may soon pivot from tightening to easing monetary policy, creating a compelling case for investors to position in UK government bonds (GILTS) ahead of potential rate cuts. Below, we dissect the data and its implications for bond markets.

Wage Growth Slows: A Key Inflation Relief Valve

The Office for National Statistics (ONS) reports that annual regular wage growth has cooled to 5.2% in Q2 2025, down from 5.6% in early 2024. When adjusted for inflation using CPIH (which includes housing costs), real-term growth has dwindled to just 1.4%, a stark contrast to the 2.6% real gains seen in late 2023. This deceleration is critical for the BoE: wage inflation accounts for 60% of core inflation, and its moderation reduces pressure on the central bank to hike rates further.

Job Vacancies Collapse: Labour Market Slack Emerges

The most striking indicator is the 34th consecutive quarterly decline in job vacancies, now at 761,000—485,000 below the 2022 peak. The unemployment-to-vacancy ratio has surged to 2.1, up from 1.7 a year ago, signaling ample slack in the labour market. Sectors like construction (down 26.7% in vacancies) and retail (down 8.3%) are leading the retreat, while AI adoption in industries like finance (where pay growth has stagnated at 3.2%) is accelerating structural shifts.

AI-Driven Structural Shifts: A Permanent Drag on Wages?

The rise of automation and AI is altering job markets permanently. Sectors like manufacturing and professional services are replacing human labor with algorithms, suppressing long-term wage pressures. Even in sectors like healthcare, where vacancies remain elevated, productivity gains from AI tools may limit the need for aggressive pay hikes. This structural disinflationary force could keep wage growth subdued even if demand rebounds, further easing BoE concerns.

BoE Rate Policy: The Pivot Point

The BoE's June 2025 meeting minutes highlighted “evidence of softening wage pressures” and “heightened uncertainty around productivity gains from AI.” With the base rate at 5.25%, the central bank is now more likely to pause hikes and signal a future cut if vacancies and wage growth remain subdued. Historical data shows that GILTS outperform equities by 8-12% in the 12 months following BoE rate cuts, making this a pivotal moment for bond investors.

Investment Strategy: Bullish on Long-Dated GILTS

• Positioning: Increase exposure to long-dated GILTS (e.g., 10- and 30-year bonds), which are most sensitive to falling rates.
• Duration Management: Use a barbell strategy, combining long-dated bonds for capital gains with short-term GILTS (e.g., 2-year) for liquidity.
• Risk Mitigation: Monitor inflation data closely; if core inflation (excluding energy and food) exceeds 5% for three consecutive months, consider trimming positions.

Conclusion: The Tide is Turning for Bond Bulls

The UK labour market slowdown, driven by cooling wage growth, collapsing vacancies, and AI's structural impact, is setting the stage for a BoE policy pivot. Investors ignoring this trend risk missing the next leg of the bond rally. With GILTS offering 4.8-6.5% yields at time of writing—among the highest in developed markets—now is the time to position for a rate-cut cycle.

As the BoE's hawkish stance fades, GILTS are poised to shine, even if headline inflation remains stubborn. The question is no longer whether the slowdown will force a policy shift, but how quickly investors can capitalize on it.