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With this morning’s July wage data broadly meeting consensus expectations, markets are no clearer on the next move for Bank Rate ahead of a policy announcement on September 19th, though a hold in rates continues to look most likely.
Average weekly earnings rose by 4.0% 3m/YoY in July, 0.1pp below expectations and a 0.6pp fall from a June reading that itself revised up to 4.6%. Excluding bonuses, however, headline wage growth fell from 5.4% 3m/YoY to 5.1%, matching consensus projections. All told, this has left market expectations for Bank of England rate cuts little moved this morning, with sterling similarly untroubled by the latest news. We now look towards a speech from BoE Deputy Governor Breeden set to be published later today, alongside next week’s inflation prints, as the main outstanding events ahead of the MPC policy decision this month.
Looking through the details of today’s report, private sector regular pay likely remains a focus for the MPC given the passthrough dynamic between private sector wages and services inflation that continues to prove sticky.
On this score, private sector regular pay growth fell to 4.9% 3m/YoY, down from 5.3% previously. On a single-month basis, the measure printed at 4.9% YoY, coming after prints of 5.0% in both May and June. For the BoE, this offers something of a mixed bag of signals. On the one hand, upward revisions to prior readings now mean that private sector wage growth overshot Bank staff forecasts by 0.2pp in Q2, in contrast to only a 0.1pp upside miss previously. On the other, the 3m/YoY wage growth is now just 0.1pp above Bank forecasts for the end of Q3. All in all, we doubt this tips the balance of risks either way for policymakers ahead of next week’s rate decision.
Similarly, we think employment also offers an inconclusive steer. Granted, the unemployment rate met economist forecasts, falling from 4.2% to 4.1%, but given ongoing quality concerns over the Labour Force Survey, this is likely to be discounted in any decision-making. Meanwhile, the typically volatile 3m/3m employment change rose sharply in July, showing 265k jobs added, well above the consensus estimate of just 123k. The timelier PAYE measure of employment change, however, showed a below expectations drop of -59k in August, suggesting that any early Q3 resilience in jobs gains may well be a temporary blip rather than a more sustained re-heating for the labour market.
Taken as a whole, today’s data continues to point toward a labour market that is moving in the right direction for the MPC, albeit gradually.
Wage growth is cooling, but remains well above levels that are consistent with the BoE’s 2% inflation target. Looking forward, the timelier REC report on jobs showed a notable drop across both the permanent placements and salary indicators for August, suggesting that more progress is in the pipeline too. The big question markets ahead of this month’s policy meeting is whether this slowdown is happening fast enough for the BoE to deliver back-to-back rate cuts. We think it could be, and that markets are underestimating the likelihood, assigning odds of just 20% to a September rate cut. Even so, our base case continues to favour a hold this month on balance, with solid GDP growth and a slow and steady normalisation for both wage and price growth helping to mitigate downside risks. We will get a better steer on if this view is shared by core MPC members later today, with the publication of a speech from the MPC’s Sarah Breeden – any dovishness is likely to leave Bank Rate expectations hanging in the balance ahead of next week’s CPI release.
Author:
Nick Rees, Senior FX Market Analyst