UK labour market remains too strong for the BoE to consider cutting interest rates yet

A difficult set of employment data from the UK, as far as the Bank of England (BoE) is concerned, which will do nothing to assuage lingering concerns among some Monetary Policy Committee (MPC) members that the labour market remains a potential source of inflationary pressures. We had already been warned that the headline rate of unemployment would print lower this month following the publication last week by the Office for National Statistics (ONS) of the revised Labour Force Survey, which showed the figure dropping from 4.2% to 3.9% as new measures of population growth were incorporated. But while that drop was a measurement phenomenon, today’s further 0.1% fall suggests labour market developments are moving in the wrong direction, and that may be setting some alarm bells ringing inside the BoE.

Equally concerning will be the earnings numbers, with both measures provided falling less than expected and both also revised higher for last month (November). Even though the small crumb of comfort is that wages growth overall is continuing to soften (the 3mth-on-3mth annualized rate of growth of average weekly earnings ex-bonuses has now fallen to 2.5% from 2.9%), the numbers remain far too strong still to be compatible with a 2% inflation target, and this is before the approximate 10% rise in the National Minimum Wages kicks in from this April, the result of which is expected to see many low-pay employers forced to raise wages. Accordingly, it is hard not to conclude that the BoE will judge the labour market to still be running too hot to contemplate any cuts in interest rates being delivered any time soon.

The caveat to this, of course, is that survey data is not painting the same picture. A number of surveys suggest that labour availability is actually improving and vacancies falling, while reports on wages growth are pointing to a significant slowdown in growth over the next twelve months. For example, the most recent Report on Jobs survey complied by S&P is showing starting salaries and temporary pay falling to three-year lows, while fears of redundancy and general job insecurity are rising, both of which will deter employees from seeking large pay rises. And the ONS survey itself remains far from perfect; work to improve the participation rate in the survey remains ongoing, with face-to-face interviews only resumed last October. And while the number of participants contacted was increased in January, the benefits of this larger survey sample will not be seen yet. Tellingly, the ONS itself is warning that the data should be “treated with caution”.

But it is the headline numbers that matter for the market, and today’s numbers will be seen as underscoring the BoE’s on-going message that monetary policy needs to remain tight and refusing to suggest that an interest rate cut might be on the near horizon.

The position in the UK is very much dovetailing with what we have been seeing recently in the US and EU, where rate cut expectations from both the Fed and the ECB have been tempered lately. The picture evolving is one that suggests that, in the major economies at least, monetary policy looks set to be tighter in 2024 than was previously anticipated. In the UK, even though we need to wait until tomorrow for the latest CPI numbers, we may start to see the market already start paring back the degree of loosening expected from the BoE this year.