This morning’s UK labour market data further muddies the waters ahead of the August Bank of England decision in two weeks’ time, after yesterday’s hotter-than-expected inflation figures, with the labour market continuing to show some signs of slack, as earnings pressures ease somewhat, despite remaining incompatible with a return to the 2% inflation target.
Unemployment held steady at 4.4% in the three months to May, remaining at its highest level since September 2021, though the now long-standing caveat over data quality concerns, as we await the ‘transformed’ labour force survey, must apply once again.
Meanwhile, earnings pressures eased somewhat, though remain significant, albeit with the impact of April’s minimum wage rise, and other associated wage increases for lower income earners, likely continuing to skew the data higher.
In any case, regular pay rose at its slowest rate since September 2022, something that the MPC’s doves may point to as a sign that wage pressures are beginning to abate, albeit remaining at a level that should keep services inflation, in particular, underpinned for some time.
On the whole, after yesterday’s inflation report showed a continued lack of progress in stamping out signs of persistent price pressures, with both core and services inflation holding steady at 3.5% and 5.7% respectively, I continue to see it likely that the ‘Old Lady’ will err on the side of caution, delaying the first rate cut of the cycle to September at the earliest.
Nevertheless, after June’s “finely balanced” decision to hold Bank Rate steady, it is tough to have a high degree of conviction in the MPC’s next move, with the August meeting again likely to see a split vote, with a high likelihood that at least one more policymaker joins Ramsden and Dhingra in voting for a cut at the next meeting.
While the GBP OIS curve has already repriced hawkishly after yesterday’s figures, markets continue to see a one-in-three chance of a 25bp cut in a fortnight. hence the pound should remain underpinned, having broken north of $1.30 to trade at fresh 12-month highs, if the recent hawkish repricing continues to gather momentum.
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