U.K. labor market cools but business confidence returns. Are high interest rates paying off?

Hiring intentions among British employers have fallen for ten months in a row—and that may be good news for those hoping for an interest rate cut.

To understand why, consider that while interest rates may be a government’s main tool for dealing with inflation in modern economies, that tool is a bludgeon, not a scalpel.

High rates cut price growth by knocking demand out of economies, in particular hitting consumers and businesses that have, or were planning to take, high levels of debt.

One of the reasons interest rates have remained high for so long, since they began to rise globally in late 2021, is because wage inflation has proved harder to stamp out than price inflation. A survey by the U.K.'s Chartered Institute of Personnel and Development, reported by Reuters, found that even after two years of high or rising interest rates, British private sector employers still intend to increase wages by above-inflation 4% over the next 12 months.

If central banks cut rates too soon, then the knock-on cost of those wage increases could push the overall prices of goods and services back up.

Which is where those British hiring intentions come in. According to the Business Trends report by accountancy firm BDO, based on a meta-analysis of employer surveys, the country has seen 10 straight months of decline in its Employment Index, which measures hiring intent. The index figure—97.3, if you're interested—is the lowest since early 2013, when there was an unemployment spike following the financial crisis.

A loose job market means more workers than vacancies, handing negotiating power back to employers, and eventually filtering through to reduced pay rises.

That may be bad for our wallets, but it’s great news if you’re a central bank governor looking for signs that the economy can handle a rate cut.

“Cautious optimism is the order of the day for U.K. businesses hoping for an interest rate cut this summer,” said BDO partner Kaley Crossthwaite.

She points also to the Business Trends report’s positive figures on business confidence, services output and inflation, all of which suggest the time may soon be right for interest rates in the U.K. to follow Sweden and start to drop.

“It’s heartening to see a turning point begin to materialise for the economy,” Crossthwaite added.

The Bank of England declined to drop interest rates this month, but is widely expect to make two quarter point cuts later this year.

It may have taken longer than many had hoped, but providing a stimulus to the economy once wage inflation is under control would likely provide a more stable basis for future growth.

This story was originally featured on Fortune.com