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UK labour market data delivered a downside surprise, confirming no further rate hikes are on the horizon from the Bank of England.
If anything, this morning’s release offers something of a goldilocks report for policymakers on Threadneedle street. Wage growth fell faster than anticipated, with average weekly earnings rising by 7.2% 3m/YoY in October, down from September’s 8.0% increase and significantly undershooting the 7.7% growth expected by markets. Whilst this should translate into sustained disinflation over coming months, the rate of increase remains too high to cast serious doubt on the credibility of the BoEs high for longer stance. Moreover, with pay continuing to grow in real terms, 1.3% YoY in this latest set of figures, this should continue to support economic activity into 2024, weighing against recession risks that are plaguing other European economics at present.
All told, the mix of cooling inflation, relatively high nominal interest rates and a stable growth outlook as indicated by this morning’s data should offer a positive mix for sterling over the medium term.
The downward trend in wage growth was not just limited to headline figures either. Excluding bonuses, wages grew by 7.3% 3m/YoY. Though this only undershot consensus expectations by 0.1 percentage points, it still showed a considerable decline from the previous months 7.8% reading. For a Bank of England concerned with inflation persistence, however, private sector wages remain the focus of attention, a point repeatedly highlighted by BoE communications as key to policymaker thinking on underlying price growth pressures. Here, pay growth fell to 7.3% 3m/YoY and showed just a 6.4% increase on a single month basis in October. This not only brings the official rate of pay increase broadly in line with the outcome of the BoE’s Decision Maker Panel, which indicated wage growth of 6.8% in October, but barring a significant and unexpected reacceleration, wage growth is now on track to significantly undershoot BoE forecasts that see the measure at 7.2% in December.
Even so, despite cooling pay pressures, the MPC is unlikely to be declaring victory over inflation just yet.
Indeed, whilst some wage sensitive sectors saw a modest decline in pay in November, with accommodation and food service activities delivering a -0.76% fall, and the arts, entertainment and recreation sector seeing a -0.65% decline in pay, wages in wholesale and retail actually grew by 0.55%. Moreover, experimental figures showed the unemployment rate remained unchanged at 4.2% in October, still below BoE estimates of neutral, though broadly in line with Bank staff projections. Indeed, it has been a notable feature of recent PMI reports that whilst pay pressures are easing, passthrough of wage increases to prices charged has picked up in recent months, suggesting that restrictive monetary policy is necessary to continue taming inflation despite the cooling pay pressures.
As such, it is notable that despite the headline undershoot, an outcome that would normally be expected to see sterling weakness as traders accelerate BoE rate cut bets, downside pressure on the pound has been modest so far this morning.
Admittedly, markets are now once again fully pricing a rate cut in June 2024, having pared expectations over recent sessions. But when compared with the eurozone where inflation has fallen off a cliff and recession looks likely, today’s data contrasts in a positive light in our view. It should do little to change the narrative from the BoE later this week, with sufficient ammunition for policymakers to credibly defend a high for longer stance, and pushback on the notion of rate cuts in H1 2024. In our view, this still seems the most likely outcome for Bank Rate, with a more rapid cooling needed to convince policymakers to cut as early as markets expect, something that was not delivered this morning despite the headline undershoot. All told, this should see sterling upside later this week as a more conservative BoE contrasts with more dovish narratives from European central banks.
Author:
Nick Rees, FX Market Analyst