Latest UK labour market data fails to open the door further on an August rate cut

Today’s employment report from the UK provides further evidence that the labour market is cooling. But it is probably not enough to persuade the Bank of England (BoE) to cut interest rates in August.

This morning’s labour market statistics for May came in broadly in line with expectations. The headline rate of unemployment remained unchanged at 4.4% while the number of jobless claims rose by just over 32k. The earnings growth numbers also slowed as expected, with both the average weekly earnings number and the earnings number ex bonuses printing at 5.7%. Given the on-going reliability issues surrounding the employment figures, the BoE will place more weight on the earnings figures when determining whether to cut interest rates or not, and which at face value suggest the labour market is continuing to cool.

But published at the same time are the payrolled employees numbers and these will be a little concerning, as they showed an increase of 16k workers in June and contained an upwards revised to the May number, from -3k to +54k. With June's number also at risk of being revised higher next month, these numbers do not suggest demand for labour is materially weakening. Indeed, after showing a dip in hiring between February and April, the figures for the last two months suggest that jobs growth is actually picking up again, with the UK’s recovery from last year’s recession the most likely reason behind this. And painting a similar picture is the redundancies data, which remained unchanged at 98k in the three months to May and continues to hover at an historically low level. With the UK growth figures so far this year surprising on the strong side, the BoE may conclude that the labour market is actually at risk of tightening going forward.

Arguing in the other direction are the vacancies numbers, which fell to 889k over Q2, a fall of 30k from Q1, and accompanied by a rise in the vacancy-to-unemployment ratio. And even though the headline rate of unemployment was reported as unchanged at 4.4%, over the past two years it has risen from 3.9% to 4.4%, suggesting the underlying trend is one of easing, albeit at a glacial pace. This in itself will eventually allow the BoE to loosen policy.

But as alluded to above, the main relief for the BoE will be the wages numbers. The monthly figures, annualised, showed private-sector average weekly earnings (AWE) rising by 3.3% in May, a significant drop from the 8.9% increase seen in April. On a 3-month annualised basis they increased by 7.3% in May, the strongest reading since September 2023, although much of this is likely attributable to the 9.8% increase made to the National Living Wage in April, which will fall out of the numbers going forward. And looking ahead, pay growth should soften as pay deals agreed over H2 will be made against the backdrop of an inflation rate that has largely fallen back to target.

The key question, then, is where this leaves the BoE in terms of cutting interest rates. Unfortunately, it is hard to conclude from the data delivered so far this week that it has been presented with the ‘smoking gun’ it needs. It will be concerned about the pick-up being reported in the private payrolls numbers, while the rise in vacancies, despite steadily falling for some two years now, still remains below pre-pandemic levels and has not yet delivered the deterioration in labour market conditions required to pull down wages growth. And the wages growth numbers themselves, while continuing to show signs of softening, remain too high to be compatible with cutting interest rates yet. And when you combine these points with yesterday’s inflation report that showed core services inflation – the biggest sector in the UK economy – to be running at 5.7%, nearly three times above target, the conclusion must be that the case for easing monetary policy is not there yet.

Accordingly, while it will continue to be seen as a close call, on balance we still expect a first rate cut to be delivered in September.