UK labour market weakening; but wages growth still too strong to bring rate hiking cycle to an end yet

Today’s UK unemployment and earnings figures probably provided something for both the ‘doves’ and the ‘hawks’ in the debate over whether further monetary tightening is needed to bring CPI back to target. On balance, however, it is the ‘hawks who will feel they have been given the most ammunition in terms of justifying their stance.

This morning’s numbers showed that the weakening that had started to be seen in the labour market is gathering momentum, with the number of workers employed in the UK falling by 207k and the overall level of unemployment rising 0.1% to 4.3%. Indeed, the slack being seen in the labour market is growing at a faster rate than the BoE’s Monetary Policy Committee forecast in the August Monetary Policy Report. The headline unemployment rate already exceeds the MPC’s expected 4.1% forecast for Q3 and is now very much in line with its estimate of the equilibrium rate of 4.25%. Further, the MPC’s favoured measure of labour market tightness, the 3-mth average vacancy to unemployment rate, fell to 0.71 in July from 0.72 in June, continuing its steady decline from the peak 1.05 reading seen in August 2022. With the number of vacancies reported today to have fallen by a further 64k, this ratio looks set to continue moving lower.

But the bugbear continues to be wages growth, and today’s figure showing that average earnings excluding bonuses remained unchanged at 7.8% over the year will likely be enough to see a majority on the MPC conclude that it cannot risk yet ending the monetary tightening cycle and that a further increase in interest rates is needed. The MPC will also be aware that first estimates of the earnings data have tendency to be revised upwards, suggesting the need for even more caution. Even if the numbers are not revised, July’s 9.3% three-month-on-three-month annualised increase in wages excluding bonuses is too high for the MPC to stop raising rates just yet.

Accordingly, barring any significant surprise in next week’s inflation numbers, a further interest rate rise of 25bps looks to now be a certainty; but the end of the current tightening cycle now appears to be not too far away.