UK employment data paints a mixed picture for the Bank of England

Today’s UK employment figures showed a sharp rise in the level of unemployment, the 3mth-on-3mth headline rate rising to 4.2% in February from 3.9% the previous month. But overall, the report was a bit of a mixed bag as, despite the rise in the headline rate of unemployment, wages growth remains too high for comfort still for the Bank of England (BoE) to consider cutting interest rates yet. Average weekly earnings fell only marginally, from 6.1% to 6.0%, a rate of growth that will see the BoE’s Monetary Policy Committee (MPC) continue to demur on signaling it is considering lowering interest rates any time soon, and may instead actually see it choose to try and push back market expectations on the timing of the first cut to the back-end of current expectations.

A further complication with today’s report is the uncertainty that continues to surround the Labour Force Survey (LFS) data. The Office for National Statistics (ONS) is continuing to improve its collection methodology after declining response rates started to raise doubts over the accuracy of the labour market picture that was being painted. Indeed, the LFS data had been pointing to a falling level of unemployment over H2 last year, a situation that was at odds with other survey evidence. With changes being introduced to its collection methodology since last October, the recorded rate of unemployment has now started to rise, leaving the level of unemployment now much more in line with other survey indicators that have been showing the labour market has been gradually loosening. But the ONS continues to caution about putting too much weight on the numbers just yet, as it strives to improve further its data sampling methods. Accordingly, it is the wages figures that the MPC will likely be placing most weight on at the moment.

And herein remains the big bugbear for the MPC. Annual growth of whole economy earnings did not slow at all in February, remaining at 5.6%, while month-to-month average weekly earnings rose 11.4% on an annualised basis, or 4.4% on a 3-mth basis, the strongest rate of growth for some six months and a hefty increase on the 3.3% figure recorded for January. Of course, wages data has to be treated with caution, as the figures can be strongly influenced month-to-month by industry specific pay settlements that have no read-across to the broader economy. But this aside, the underlying situation is that wages growth remains robust and has not materially buckled yet despite the loosening seen in the labour market. And going forward, wage claims are likely to increase further, given the near 10% increase in the National Living Wage that kicks in this month and which many low-wage employers have indicated they will match.

Accordingly, while wages growth should slow as the level of unemployment rises, it is going to be a slow process, and is something that will prevent the ‘hawks’ at least on the MPC from being comfortable with cutting interest rates any time soon.