This morning’s UK employment report pointed to a further cooling in labour market conditions in the three months to June, though the usual caveats around unreliability of the ONS’ data collection must continue to apply.
Unemployment unexpectedly fell to 4.2%, its lowest level since February, and considerably better than the BoE’s 4.4% forecast, as outlined in the August Monetary Policy Report.
Given the aforementioned data issues, however, policymakers currently place little weight on the jobless data, and the figures should be taken with a ‘pinch of salt’.
Meanwhile, earnings growth cooled considerably, and more than expected, from the pace seen in May, though a significant degree of said cooling owes itself to a chunky base effect stemming from last year’s NHS pay rises, which have not – yet – been repeated to the same degree.
Overall pay rose 4.5% YoY, its slowest pace since November 2021, while earnings excluding bonuses rose 5.4% YoY. Though both metrics have cooled considerably of late, they remain incompatible with a sustainable return to the 2% inflation target over the medium-term. Furthermore, additional upside earnings risks remain, particularly after the recently announced above-inflation public sector pay increases.
This is likely to be of continued concern for the hawks on the BoE’s MPC, four of which dissented in favour of maintaining Bank Rate at the August meeting, with a 25bp cut having been delivered on a wafer-thin 5-4 majority. Even for the five that did vote for a cut, some viewed such a decision as ‘finely balanced’.
Policymakers may take some solace from today’s data, given the cooling in earnings growth, and better than expected unemployment data, though there is little in today’s employment figures that is likely to hasten the pace of policy normalisation, particularly with underlying inflationary pressures remaining persistent, ahead of the July CPI report due tomorrow morning.
Hence, my base case of a quarterly pace of cuts from here on in remains, with the MPC next likely to deliver a 25bp cut – potentially via a split decision once more – at the November meeting, in conjunction with an updated round of economic forecasts.
The market curve, however, continues to discount a total of 45bp of cuts this year, which seems rather too punchy given policymakers’ reluctance to lean too heavily to the dovish end of the spectrum, potentially providing support to the GBP if some degree of this easing is priced out, though it must be said that cut pricing does look over-cooked across G10.
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