Latest employment trends underline BoE interest rate quandary
Rob Morgan, chief investment analyst at Charles Stanley: The jobs market continues to paint a glum picture for UK households. The unemployment rate has ticked up steadily through this year from 4.4% in the three months to March to 4.7% in the period to May and, as today’s figures confirm, the same level in June.
Payrolls have also declined steadily since the Budget last October – when the chancellor announced the hike in National Insurance contributions for employers – highlighting a reluctance of businesses to recruit and retain staff. Underlining this, the number of available vacancies is consistently falling too.
However, the trend of falling wage growth is more of a slow burn. The latest figure of 5% for June is markedly lower that the 5.9% recorded early in the year but it is still strong – presenting a strong counterpoint for the BoE in its consideration of further cuts to interest rates.
What does it mean for households?
Wages are still outpacing consumer inflation at around 3.5%, but with many households still recovering from the post-pandemic surge in in the cost of living alongside an ever-increasing tax burden, the mild slowdown in pay growth is applying pressure to budgets. Families are often having to run harder to keep up, finding it more difficult to save, pay down debt or sustain standards of living.
Meanwhile, with both employee numbers and vacancies falling, there’s fewer opportunities to those who find themselves laid off, highlighting the need to save and build resilience for a period out of work for those in less secure professions.
What does it mean for interest rates?
The BoE delivered an interest rate cut last week, but the historic three-way split highlighted the divergent views of MPC members and signals growing tensions in Threadneedle Street over the path of rates from this point.
For some, sticky inflation is the chief worry, outweighing the risks around the weakening labour market. Inflation well above the 2% target for a sustained period risks price rises becoming engrained in consumer expectations and company decisions.
Yet for others the deteriorating economic signals are clear enough to convince them that a downturn in demand is around the corner – and with it less pressure on prices. Certainly, the positive momentum seen in the first quarter has largely reversed with growth moving into reverse gear during the second quarter.
The decision to take a further small slice off interest rates before the end of the year therefore remains finely balanced. Today’s numbers show the employment market is weak, and potentially a precursor to further economic deterioration. But they are not yet so obviously weak to convince enough MPC members that further cuts to interest rates are appropriate.
Some may see falling job numbers as a false signal, a reaction to the higher employment costs rather than a genuine downturn in demand and will worry that still-high pay growth remains a significant factor in generating further price rises.
Overall, the trends in the employment market strengthen the case for a further cut at some point, but with September’s inflation number expected at twice the target level, the optics are challenging in the shorter term, and we may have to wait for 2026 to see sub-4% interest rates.