Today brings with it the release of the first of two key sets of data leading into the Bank of England’s latest policy decision on September 21st, with the data managing to land largely on expectations.
The unemployment rate increased in July once again as projected, and now lies at 4.3%, though the 3m/3m employment change posted a greater than anticipated fall of -207k in July, highlighting once again the growing weakening in hiring conditions. Still concerning, however, is the continued climb in average weekly earnings, modestly beating consensus forecasts with a print of 8.5% 3m/YoY. For the Bank of England, the overall picture is one where the labour market is continuing to soften. But with a weakening job market not yet translating into slowing aggregate wage growth, the MPC will likely still feel the need to hike rates next week, in line with our call for a 25bp increase in Bank Rate.
That all being said, despite the uptick in average weekly earnings, the picture might not be quite as bad as it looks at first glance.
Granted, the headline measure rose to 8.5% 3m/YoY in the July print, but much of this was the result of a 0.2pp upgrade to June numbers, which rose to 8.4%. Notably though, this is also upwardly distorted by one-off payments to NHS and civil service staff in June and July. Growth in private sector regular wages is likely to be the most notable part of the release for rate setters though, especially given the assumed passthrough to services inflation and the metrics prominence in Bank of England communications. It was therefore notable that on this measure, wages actually saw a 0.1pp fall. July’s 8.1% print, came in slightly lower than an upwardly revised June number, suggesting that the peak for wage driven inflation pressures might now be in. This was even more apparent when looking at the more volatile 1-month measure, which fell from 8.3% in June to 7.9% in July.
Private sector wage growth continues to print above Bank Staff forecasts, but may now have turned a corner
Granted this is just one reading, but we have good reason to expect that private sector pay should continue to cool over coming months.
The August REC report on jobs recorded a balance for permanent placements that dropped to -11.1 in August, having printed at -7.6 in July, the most negative since the early period of the Covid 19 pandemic. Not only that, but the rise in unemployment in today’s release, increasing to 4.3% on a three month average basis, means that this now lies above the level considered the neutral level by Bank Staff. Combined with a continued slowing in employment numbers, this points strongly towards a labour market that continues to normalise, and it is seemingly only a matter of time before this ultimately produces a softening in wage conditions. However, even with this in mind, there are other reasons for policymakers to perhaps be a little less concerned with persistent wage growth in this latest release. First, whilst recent flash PMIs have highlighted once again that pay pressures remain persistently strong, they also suggested that firms are increasingly reluctant to pass these higher costs on to consumers in the face of falling demand. This suggests that the passthrough from wages to inflation may weaken, and therefore be less concerning. Second, this release coincides with the ONS’s updates to its seasonal adjustments, meaning revisions to the wages series suggests that today’s upside surprise may be discounted more than usual in MPC deliberations.
UK Beveridge curve shows signs of continued labour market normalisation, though this is yet to translate convincingly into softening wage growth
As we see it, today’s data reinforces the notion that the Bank of England will still hike interest rates next week.
The strength of wage growth remains too strong for policymakers to declare victory, even if continued softening elsewhere in the release suggests that this is unlikely to persist for much longer. That being said, following a dovish sounding Bank of England Governor Andrew Bailey in his evidence to the Treasury Select Committee, alongside Chief Economist Huw Pill expressing a preference for a “Table Mountain” profile for Bank Rate, it appears that the core of the MPC is now looking for an opportunity to bring monetary tightening to a close. In our view, cooling inflation and wage data before the November MPC meeting should allow them to do just that. Markets appear to be of a similar mind.
Following an initial bounce in the pound on the headline numbers, those gains were retraced, and Bank Rate expectations remain unmoved.
Therefore, unless a significant surprise materialises in next week’s CPI release, a 25bp hike on September 21st that takes Bank Rate to 5.5% is likely to be the last of this tightening cycle. The concern going forwards is likely to shift from Threadneedle street to the Treasury, with the strength of wage growth likely to be a headache for the Chancellor. Barring a major upside surprise to inflation figures next week, today’s figure is almost certain to be used for the uprating of state pensions, in line with the triple lock, putting government spending plans under even greater strain.
Nick Rees, FX Market Analyst