This morning’s UK labour market data showed the employment situation having remained relatively resilient through the summer months.
Unemployment, in the three months to August, ticked lower to 4.0%, the lowest level since January, though concern remains over the unreliability of the data, due to the ongoing, and well-documented, data collection issues with the ONS’ Labour Force Survey. Policymakers, hence, are likely to place relatively little weight on this aspect of the report.
Earnings growth, meanwhile, continued to cool, with overall pay rising by 3.8%, and regular pay by 4.9%, both on an annual basis, the former being just a touch hotter than consensus expectations, albeit still representing the slowest such increase in almost four years, back to November 2020. Furthermore, such an increase points to a pace of real earnings growth that is broadly compatible with a sustainable return to the 2% inflation aim.
Nevertheless, a degree of upside earnings risk does remain, particularly as the impacts of a host of inflation-busting public sector pay increases, introduced during the summer by the new Labour government, won’t feed into the figures until the fourth quarter, potentially giving the MPC’s hawks some cause for caution.
Overall, though, this morning’s figures change little in terms of the BoE policy outlook, with the near-term pace, and magnitude, of Bank Rate cuts hinging largely on the degree of underlying inflation persistence within the economy, as opposed to any Labour market developments. As a result, tomorrow’s September CPI figures will be closely watched by participants, and have much greater potential to be a game-changer in terms of the outlook.
For now, my base case remains that the MPC will deliver this cycle’s second 25bp cut at the November meeting, likely via another split vote. Beyond that, the December meeting is something of a coin-flip, particularly after Governor Bailey’s recent remarks about the possibility of being “a bit more activist” in terms of delivering rate cuts. Were the pace of inflation to prove quicker than the Bank’s forecasts, of which a new round is due next month, then another cut in December would become considerably more likely.