UK employment data supports the case for keeping interest rates on hold

Today’s UK employment figures would have been both welcomed by the Bank of England (BoE), as well as a little disconcerting. The main positive was that wages growth is continuing to show signs of moderation, with average weekly earnings falling from 8.1% in September to 7.9%, while the weekly earnings number also showed a decline, slipping from 7.8% to 7.7%. The fact that both numbers are moving in the right direction is probably sufficient for the BoE to be comfortable that monetary policy is sufficiently tight to ensure the direction of travel remains downwards. However, the slow pace of moderation will be concerning and very much adds weight to the BoE’s recent statements that Base Rate will need to remain at its current elevated level (5.25%) for an extended period to ensure that this downwards pressure on wages growth is maintained. The clear negative consequence of this is the impediment this presents to economic activity overall, and coming at a time when economic growth is already flatlining and at considerable risk of slipping into negative territory.

Further signs of this slow pace of labour market easing were seen in the Payrolled Employees number, which rose to 33k, considerably higher than the consensus expectation of a 17k fall and coming on the back of a 32k gain seen in September. More positive was the reported fall in the number of job vacancies, down by another 58k in the three months to October, but still some 156k above pre-pandemic levels. Clearly both metrics should fall further in the face of slowing UK growth. But the underlying conclusion is that a level of robustness continues to be seen in the labour market and that labour demand is softening at only a gradual pace.

The decision by the BoE to keep interest rates on hold at its November meeting was very much predicted on signs of slowing wages growth, the softening outlook for economic activity as a whole and easing inflationary pressures. Today’s further reduction in wages growth, albeit only moderate, is in line with this stance and points to the hiking cycle now being over, a message that will be confirmed if tomorrow’s CPI figures print in line with expectations. However, the level of wages growth remains too high for the BoE to lower its guard yet regarding the risk of inflation becoming embedded and persistent. And given that the November meeting also saw it revise upwards its estimate of the equilibrium unemployment rate to 4.5% (compared to a current rate of 4.2%) then, from its own perspective, as things stand at present the labour market is continuing to stoke inflationary pressures. Accordingly, for the BoE to be sure that CPI is going to return to its 2% target within a reasonable timeframe, further economic weakness is needed to bring additional downwards pressure on labour demand. It is hard, therefore, to see any interest rate cuts being delivered before H2 2024.