Softer UK wages numbers ease pressure on the BoE to tighten policy further

A moderately softer set of earnings figures from the UK this morning, providing another sign that the labour market is cooling, albeit slowly. Headline average weekly earnings slipped back to 8.1% y/y in August, down from the 8.5% print seen in July, while the rate excluding bonuses fell more modestly to 7.8% from an upwardly revised previous figure of 7.9%. While the falls are not large in themselves, it is the direction of travel that matters, and the picture they are painting of wages growth losing momentum could be enough to persuade the Bank of England (BoE) to keep Bank Rate on hold again at 5.25% next month.

On a monthly basis, average weekly earnings rose by just 0.34% in August, nearly half the average 0.66% monthly increase seen over H1 2023, or 4.2% on an annualised basis. This is still incompatible with a 2% CPI target. But given that wages typically lag developments in the underlying labour market, where signs of loosening are continuing to grow, the outlook for wages growth is looking softer.

Going forward, an expected rise in the unemployment rate should also increasingly weigh on wages claims. The headline rate of unemployment – 4.3% - has already exceeded the BoE’s estimate of its equilibrium rate – 4.25% - and looks set to rise further as the UK workforce grows. The large falls that have been seen in the value of pension funds over the past year will discourage many workers from taking early retirement, while the pick-up in immigration seen last year shows no signs of slowing, especially given that the government has decided to raise the minimum salary threshold for a Skilled Worker Visa by just 2%. Accordingly, the size of the UK workforce looks set to continue expanding, and this expansion will play a significant role in driving the unemployment rate higher.

Other signs of a slackening labour market can be found in the Payrolled Employees figures, which showed a modest decline of -11k, extending losses for the third month in a row. Although the reduction in positions is only a modest reversal compared to the strong growth seen in employee numbers post covid, it is another sign that things are moving in the right direction. And perhaps more importantly, this emerging excess supply of labour saw the PAYE measure of median pay fall by 0.7% m/m.

On balance, today’s figures probably leave the BoE caught between a rock and a hard place. It will take comfort from the fact developments in the labour market are moving in the right direction. But wages growth still remains inconsistent with a CPI target of 2.0% and will need to slow more before BoE concerns over its inflationary impact are assuaged. If this cooling in the labour market does not pick up pace, then it may well turn out to be a struggle to bring CPI back to target within a reasonable timescale, potentially signalling the need for further monetary tightening. But at the same time, the BoE will have at the back of its mind last week’s GDP figures, which despite the positive prints, masked a picture of a deteriorating growth outlook.

As ever, the decision on whether to tighten or not may well depend on tomorrow’s CPI numbers and the market will be looking to them for a clearer signal of what the MPC’s thinking is likely to be. Until those figures are released and a clearer picture of what November's MPC meeting will deliver drawn, the possibility that at least one more rate hike may yet be delivered will continue to infect market sentiment and act as a barrier to any material rally in the Gilt market.