The UK’s labour market has shown mixed signals, with wage growth hitting its lowest rate in nearly two years, while the unemployment rate unexpectedly fell, according to the latest data from the Office for National Statistics (ONS). In the three months to June, annual earnings growth, excluding bonuses, slowed to 5.4%, down from a revised 5.8% in the previous quarter. This marks the lowest level since July 2022 and aligns with economists’ forecasts. The slowdown in wage growth is likely to be welcomed by the Bank of England (BoE) as an indication of cooling labour market conditions. This development lends support to the prediction that the BoE will proceed with two more 25 basis point interest rate cuts later this year.
Surprisingly, the ONS reported that the UK unemployment rate fell to 4.2% in the three months to June, down from 4.4% in the previous quarter. This contradicts economists’ expectations of an increase to 4.5%. The conflicting signals between the wage growth data and the unemployment rate have raised questions about the reliability of the unemployment data, which is derived from a survey with low response rates. Economists suggest that the BoE’s Monetary Policy Committee (MPC) will likely place less emphasis on the employment data, given the issues with the labour force survey.
However, the recent recovery in economic growth and rebounding payroll employment in July indicate that the labour market might not be slowing down as much as anticipated. This could make it challenging for the MPC to justify consecutive interest rate cuts, with some economists now expecting the BoE to wait until November to cut the bank rate again.
The latest figures come ahead of the UK inflation data for July, which is expected to show price growth rising back above the BoE’s 2% target to 2.3%, partly due to reduced drag from household energy bills. The MPC closely monitors wage growth as a key indicator of domestic price pressures and inflation, with a particular focus on private sector pay growth. As the UK continues to navigate the post-pandemic economy, the mixed signals from the labour market will likely prolong disagreements within the BoE regarding the appropriate monetary policy stance. Chancellor Rachel Reeves emphasised the need to support people into employment, stating that “if you can work, you should work.”
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