Soft UK jobs data give BOE room to hold rates despite oil risk

UK labour market continues to loosen

The latest UK employment data point to a labour market that is gradually losing momentum.

The number of employees on company payrolls fell by 4,000 in June after rising by 3,000 in May. The decline was smaller than the 8,000 drop expected by markets, but it still signaled renewed weakness in labour demand.

The broader trend remains soft. Payroll employment was down by 10,000 over the three months to June, following a decline of 11,000 in the previous three-month period.

Vacancies also fell further in the three months to June compared with the period ending in March. As vacancies are often viewed as a leading indicator of labour demand, the continued decline suggests companies are becoming more cautious about hiring.

Higher energy costs and tighter financing conditions may be contributing to that caution, especially in sectors already facing weak consumer demand and pressure on margins.

Unemployment holds at 4.9%

The unemployment rate remained unchanged at 4.9% in the three months to May, matching both market expectations and economic forecasts.

That remains slightly below the Bank of England’s projection of 5.1% for the second quarter under one of its central scenarios.

On the surface, the stable unemployment rate suggests the labour market has not deteriorated sharply. But the combination of falling payrolls and declining vacancies indicates that demand for workers is weakening beneath the headline number.

This is important for monetary policy because a cooler labour market usually reduces wage pressure and makes it harder for companies to pass higher costs on to consumers.

Employment survey data remain unreliable

The latest labour figures also come with a significant warning over data quality.

The UK Labour Force Survey has suffered from historically low response rates in recent years. A more recent error in the survey collection process further reduced the reliability of the latest employment figures.

The most recent release indicated a material increase in employment, but the Office for National Statistics had already warned that this part of the report should be treated with additional caution.

That means policymakers are likely to place greater weight on payroll records, vacancies and wage data when assessing labour-market conditions.

Those indicators currently point toward gradual weakening rather than renewed strength.

Private-sector wage growth eases

Private-sector regular pay growth, one of the measures most closely watched by the BOE, slowed to 2.9% in the three months to May.

The previous reading was revised up to 3% from an initially reported 2.9%. The latest figure matched expectations and came slightly below the BOE’s second-quarter forecast of 3%.

The decline is modest, but the direction is important.

The BOE has been closely monitoring private-sector wages because persistent pay growth can keep services inflation elevated. A move below 3% suggests domestic inflation pressure may be becoming more manageable, particularly if payrolls and vacancies continue to decline.

This gives policymakers additional justification to avoid tightening monetary policy immediately.

BOE has room to hold in July

The softer labour-market data support the case for the Bank of England to leave interest rates unchanged at its July meeting.

The central bank is facing two opposing forces.

On one side, labour demand is weakening, wage growth is slowing and unemployment is expected to rise gradually. These developments argue against another rate increase.

On the other side, renewed geopolitical tensions have pushed energy prices higher, creating the risk of another rise in headline inflation.

For now, the labour-market weakness appears sufficient to give the BOE room to wait and assess how persistent the energy shock becomes.

The baseline outlook is for rates to remain unchanged throughout 2026.

Inflation expected to stay near 3%

Under a scenario where Brent crude averages around $80 a barrel during the second half of the year, headline UK inflation is expected to remain close to 3%.

That would still be above the BOE’s 2% target, but it may not be enough to force another rate increase if wage growth and domestic demand continue to cool.

The same baseline sees the unemployment rate rising gradually and peaking at around 5.4% in early 2027.

That combination — inflation near 3% and unemployment moving higher — would leave the BOE in a difficult position, but it would likely favor holding rates rather than tightening further.

A rate increase would become harder to justify if it risked accelerating the deterioration in employment.

Oil at $90 raises the risk of a later hike

The main threat to the hold scenario is energy.

Renewed tensions between the US and Iran have pushed oil prices toward $90 a barrel, above the $80 level assumed in the baseline forecast.

A temporary increase may not be enough to change the BOE’s July decision. Policymakers are likely to distinguish between a short-lived geopolitical spike and a sustained rise that feeds into household energy costs, transport prices and inflation expectations.

But if Brent remains near $90 or rises further, the policy outlook could change.

Persistent energy inflation could slow the decline in headline CPI and increase the risk that higher costs spread into wages and services prices. In that situation, a rate hike later in the year could return to the table.

What the BOE will watch next

The next policy decisions will depend on whether the softening in the labour market continues and whether higher oil prices become embedded in the inflation outlook.

Policymakers will focus on payroll growth, vacancies, private-sector wages and the unemployment rate. They will also watch whether businesses begin passing higher energy and financing costs on to consumers.

A continued decline in payrolls and wage growth would strengthen the case for an extended hold.

A sustained oil shock combined with sticky services inflation would create a much more difficult choice and could force the BOE to reconsider tightening.