21 October 2026: Signs of stabilising employment rates boost chance of BoE rate hike

Former Burnham economic adviser and Bank of England Chief Economist Andy Haldane has warned that the Burnham Government is not working for the economy.

A key component of the government’s economic plan “does not work”, and he has urged ministers to protect the Treasury’s “headroom” in next week’s Budget.

Haldane said now was not the time to run down what he described as the UK’s “insurance cover”, given high borrowing costs and the risks facing the economy from the ongoing impacts of the wars in Iran and Ukraine.

He added that he hoped Chancellor John Healey would unveil a Budget that would favour businesses and the bond markets by avoiding further taxes on already-struggling firms and by reigning in spending. Still, he feared it would instead be designed to appease backbench Labour MPs, especially on welfare benefits and the NHS.

Britain’s fiscal watchdog is also likely to sound the alarm on the government's spending pressures when it lays out its analysis of the Budget next week, City economists have predicted, in a significant move signalling the scale of the challenges facing the Chancellor.

John Healey faces a crunch Spending Review next year, in which he will set out a route to raise defence spending to three percent of GDP, which could cost the government around £11bn more in spending each year. The OBR is expected to highlight the scale of that challenge when it assesses his fiscal plans, according to economists.

Analysts have predicted the review will also highlight additional dilemmas in government spending that aren't captured in central figures on headroom, taxation, or spending increases.

These could include warnings about the trajectory of defence spending, welfare, and planned efficiencies by 2029, it is suggested.

Alerts flagged by the independent body, whose forecasts at the Budget determine whether the Chancellor meets his fiscal rules, would represent a caution against the Chancellor’s plans at a time when bond traders and economists are closely monitoring spending plans.

It was this review that was mistakenly released to the public before former Chancellor Rachel Reeves presented her budget to MPs last year,

The latest UK employment data was published yesterday, and signs point to a stabilising UK market, opening the door for the Bank of England to hike rates by 25bps to 4% in the first week of November, according to market analysts.

The number of paid employees fell by 111,000 year-on-year between August 2025 and August 2026, but remained broadly flat over the month, according to the Office for National Statistics.

Meanwhile, early September estimates show employee numbers down 66,000 year on year but up 13,000 month on month, suggesting tentative signs that conditions may be stabilising.

In addition, the unemployment rate fell to 4.7% in the three months to August, while vacancies fell by 21,000 to 691,000 from July to September.

Taken together, these figures suggest the jobs market may be finding a floor, but businesses remain cautious about adding to headcount.

"The government will be hoping the Budget can help restore some of the confidence needed to get companies hiring again."

From an investor's perspective, stronger employment supports consumer spending, but ‘the prospect of higher borrowing costs creates a more difficult backdrop’.

Sterling could benefit from rising rate expectations, while gilts and interest-rate-sensitive sectors such as property may come under pressure. Good news for workers is not necessarily good news for markets.

Sterling had a strong session yesterday, outperforming the US dollar and holding broadly firm against other major currencies. GBP/USD rose from around 1.3304 to 1.3379, up about 0.6% on the day, with an intraday high near 1.3410.

The sheer scale of investment in data centres is raising concern as it surpasses all other historical booms and crowds out other, more job-creating ventures.

No industry has driven the U.S. economy as strongly since the railroad expansion of the late 1800s, when titans battled to lay transcontinental tracks connecting America from coast to coast.

Railroads in the 19th century consumed about $173 billion in today’s money and created more than 2% of the nation’s annual economic output (GDP) over 20 years.

Today’s data centre buildout will dwarf that amount, with $10 trillion in investment, and now has almost twice the economic impact, nearly 4% of GDP, according to a report by Columbia Business School.

States are starting to feel left out of the windfall, many having granted tax exemptions before the boom.

Years ago, before artificial intelligence prompted a tsunami of building, states typically welcomed data centres supporting internet traffic, offering tax abatements and other perks. Many officials are now rethinking that approach as tax revenues take a bigger hit and high energy demands hurt affordability.

Nevada, for instance, trimmed tax abatements and, in a September executive order from the State Governor’s office, will ask data centres to foot the bill for energy and water demands.

States where data centre costs will be concentrated over the next three years are Texas (638 billion), Virginia (249 billion), Ohio (169 billion), and Georgia (160 billion), according to projections from a market intelligence firm.

Southern states dominate the landscape for planned data centres, with large numbers also proposed in Arizona, California, Florida, Indiana, Iowa, North Carolina, Oregon, Pennsylvania and Washington state, according to a Research Centre report in April.

AI profitability has yet to catch up with buildout costs.

Further, the artificial intelligence boom, increasingly acknowledged at the Federal Reserve as helping to drive inflation, has left central bankers trying to cool the rest of the economy to ease price pressures, even as an industry of marquee names such as Amazon, Apple and Anthropic is considered immune to rate hikes.

Fed officials know their blunt tool of raising borrowing costs lands unevenly. With AI firms spending as if money is no object, economists see the pain of rate hikes falling elsewhere, on firms and families more reliant on credit, or on small- and medium-sized businesses that temper their investment plans as borrowing costs escalate.

“There are paths to get there,” ADP Chief Economist Nela Richardson said of the Fed’s 2% inflation goal, unmet for more than five years. “It’s just that not every road is open,” with the housing market already weak, for example, and the labour market not seen as a source of inflation through rising wages.

“What’s left? Small businesses, because they need bank loans, and consumers who need to fund payments with debt and credit cards…Maybe the stock market,” she said, noting that the stock market is seen as supporting consumer spending for wealthier households but is often vulnerable to rising rates.

Stocks dropped last week after an unexpectedly strong inflation report fueled expectations that the Fed will have to raise rates further.

Cleveland Fed President Beth Hammack recently pointed to tempered stock market gains and slowed activity outside the AI boom as ways higher rates could cool the economy “at the margins.”

Bull markets rarely end because of a single speech. But they can start to wobble when the cost of money changes. The four-year rally has leaned heavily on the AI investment boom, which is increasingly funded by new debt, while a surge in bond yields has investors worried. Until recently, investors have largely shrugged off that risk.

Those nerves have already shown up on the screen. On October 16, the S&P 500 technology sector fell more than 3% as concerns about AI financing costs and heavy debt loads at data centre operators rippled through the market.

Now, a short phrase from the Fed chair is adding to the unease.

At his press conference, Warsh said the Fed had removed a “dose of accommodation.” He repeated that phrase three times to reporters.

The wording suggests he and his colleagues don't see current policy as tight, leaving room to reduce support further if inflation stays stubborn. In other words, the Fed is easing off the accelerator and pressing the brakes harder.

The US dollar was generally weaker across global FX markets yesterday, losing ground against several major currencies, most notably the pound.

What began as a pupils’ protest against deteriorating conditions in schools escalated into widespread riots led by a radical socialist mob. There were clashes with police; the Limoges town hall was burned, the Marseille city hall was stormed, shops were looted, and cars were set on fire. Police officers were injured, and thousands of people were arrested. Beyond expressing shock, the government appears helpless.

Underlying the widespread frustration and bitterness are sharply rising living costs, migration, and failed integration. Excessive public spending and the populist misallocation of funds have created a heavy debt burden. Refinancing is expensive as confidence in capital markets wanes. Past mismanagement now limits the government’s ability to respond and the funds available to do so. All President Macron can offer is a pathos-filled speech.

Riots are spilling over into Belgium and Italy. Such unrest is not unusual in France, nor is it necessarily new.

Moreover, excessive government spending across Europe is creating staggering debt levels and fuelling inflation. Under these conditions, even the European Central Bank’s interest rate increases do little to curb inflation. The debt problem is now most acute in France, but it is a European disease.

France’s elections are early next year, with nationalist tendencies on one side and extremism on the other.

Ironically, Andy Burnham must see the French economy as paradise, with the state accounting for a staggering 57% of the nation’s GDP. This is what must change most in the budget discussions taking place in Paris. Even at the height of the UK’s problems in the mid-1970s, the state contributed around 45% of total GDP. This led to the rise of Thatcherism and later Blairism.

With fuel prices soaring, the cost of living has become a top concern for the French public, shaping candidates' rhetoric and platforms ahead of the 2027 presidential election. Hundreds of thousands marched on Saturday, October 17, in protest against the cost of living, though the demonstrations were overshadowed by violence and looting.

Proposals range from raising wages to lowering fuel prices, with parties across the political spectrum weighing in.

But does the decline in living standards many French people feel actually show up in the data?

One source of concern and anger over the cost of living is inflation. Since President Emmanuel Macron took office in 2017, prices have risen by 23.4%, driven by three main spikes.

European wholesale natural gas futures paused near their 2022 highs on Monday, consolidating after a multi-month bull run as broader macro headwinds and surging Eurozone borrowing costs curbed spot buying momentum. The benchmark Dutch front-month contract held virtually flat at 87.88 euros per megawatt-hour (MWh). In Great Britain, the equivalent NBP natural gas futures contract also held steady around 217.20 pence per therm.

Major investment houses and hedge funds are reviewing energy demand forecasts after European Central Bank President Christine Lagarde made public comments over the weekend.

Speaking on Saturday about cross-asset volatility, Lagarde noted that the recent sell-off in sovereign bond markets is driving up borrowing costs across the Eurozone, tightening financial conditions and slowing overall economic growth.

Lagarde warned that this market-driven tightening will make it significantly harder than the ECB had projected last month for European households and industrial firms to absorb higher fuel and power bills stemming from ongoing Middle East conflicts.

With the ECB widely expected to hike rates again in December to 2.75%, elevated funding costs are expected to weigh on gas-fired industrial activity through the remainder of the year.

Tighter financial conditions are weighing on economic output, while long-term structural supply risks keep European gas bourses severely constrained.

Seaborne liquefied natural gas (LNG) deliveries transiting the Strait of Hormuz remain heavily constrained by maritime attacks and extended rerouting around Africa, keeping spot arrivals at European import terminals tight.

European Union underground gas storage caverns sit underfilled compared with historical seasonal norms, leaving the continent acutely vulnerable to sudden cold snaps as winter drawdown begins.

The Euro was broadly steady to slightly firmer yesterday, benefiting from the same softer US dollar backdrop that supported sterling, though its gains were more modest than the pound's.

Have a great day!