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Average weekly earnings in the UK grew by an average of 5.9% in the three months to April when compared to a year earlier, unchanged from an upwardly revised print seen prior, but above expectations that looked for wage growth to cool to 5.7% 3m/YoY.
Moreover, once excluding bonuses, weekly earnings grew by 6% 3m/YoY in April, unchanged from March, fractionally below the 6.1% expected by economists. While the outcome of the wage data proved mixed, we still think a degree of caution from policymakers is warranted given uncertainties around the National Living Wage implementation, and the fact that the official data stands in contrast to alternative labour market indicators that had pointed to a jump in wage pressures in April. Nevertheless, these latest figures will come as a welcome relief for the BoE, with no significant uptick in wage growth from April’s NLW rise visible in the aggregate.
With this in mind, barring an upwards revision in the May figures and assuming that wage deceleration begins to resume in the coming months, the BoE should remain on track to start cutting policy rates in August, in line with our base case.
The details of today’s jobs report also pose little challenge to this narrative. Most significantly, the private sector weekly earnings ex-bonus measure, closely watched by the MPC, eased 0.1pp, falling to 5.8% 3m/YoY. On a single month basis, the deceleration was more pronounced as it fell to 5.7% YoY, 0.2pp below the March reading. While Bank staff did not provide monthly projections for regular pay growth in the May MPR, they did forecast it to fall to 5.1% 3m/YoY in Q2, down from 6.0% in Q1. Today’s number would require a relatively sharp deceleration over May and June in order to hit that figure, but not one that is out of the realm of possibility. The key factor weighing in favour of such a slowdown are signs of loosening in the labour market, a point reconfirmed in today’s data. The unemployment ticked up 0.1pp to 4.4%, whilst April also saw overall employment contract by –139k on a rolling quarterly basis, which follows a -178k fall in March on the same basis. Granted, the ongoing issues with the Labour Force Survey means this likely carries less weight than usual with the MPC at present, but we suspect that this still carries at least some signal for policymakers, especially as it aligns with other indicators such as the REC Report on Jobs that also point to building labour market slack.
Similar to the official Labour Force Survey data released today, however, the REC report on jobs also offered some mixed signals, once again confirming our view that policymakers at the BoE will await clearer guidance from the data before cutting rates.
Specifically, the April REC report on jobs showed the permanent salaries index jumping from 53.3 to 55.9, with this remaining elevated at 55.5 in the May edition. This was also reflected in the S&P PMI report for April, which remarked on the strong impact of the NLW rise. As such, it is a little surprising to see official pay growth merely stagnate. Here, we think the implementation of the NLW rise may also be a factor. While the measure was officially increased on April 1st, employers only had to implement this increase in the subsequent pay period. With roughly three in four employers paying monthly in the UK, this could have pushed some of the increase in wages into the May data.
As we see it, these uncertainties should keep the BoE relatively cautious over the next month, at least until the May wage data has been published.
A resumption of wage deceleration in the May data should comfortably open the door to a rate cut in August. Even if the next round of pay figures overshoots expectations, however, we would not rule out the MPC easing policy in August, given that we think they should have sufficient information from alternative macroeconomic indicators to look through NLW induced distortions by that point. What this should mean though, is that any realignment of market expectations with this base case is likely to have to wait until later in the summer. This should keep sterling on track for a relatively quiet end to the second quarter as monetary policy expectations stabilise. That is what is playing out this morning, with the pound only modestly weaker on the data release, even as the move in Gilt yields proves more pronounced.
Author:
Nick Rees, FX Market Analyst