The latest data suggests that the UK labour market is stabilising after April’s big rise in employment costs prompted firms to reduce headcounts. HMRC Payrolls numbers continue to fall, but by far smaller amounts than before. Vacancies rose too for the first time in over a year. Meanwhile, pay growth remains heightened and is only easing gradually. This combination of a stabilising jobs market and elevated pay growth should encourage the Monetary Policy Committee (MPC) to focus on returning inflation to target. Indeed, we think the MPC will likely decide to keep interest rates on hold for the rest of the year, before opting for a February cut to interest rates.

Latest UK figures show labour market stabilising?

The headline Labour Force Survey (LFS) employment figures for the three months to July point to a huge 232,000 gain in employment. This helped steady the unemployment rate at 4.7%. However, the LFS continues to be distorted by a low response rate, despite the ONS’s best efforts to improve the sample size. As a result, we must continue to look beyond the LFS’s employment statistics to get a clearer picture of the job market.

HMRC Payrolls data, which have lately painted a much starker picture of employment than the LFS, saw headcounts fall by 8,000 in August. While retail and hospitality accounted for much of the decline, August’s drop was much smaller than those of the past few months. What’s more, payrolls data exclude people classed as self-employed. Because April’s payroll tax hikes incentivised self-employment, this could be why official LFS employment statistics have outperformed HMRC Payrolls data recently.

The ONS’s less timely quarterly Workforce Jobs data may help confirm this picture. Unlike the LFS, which surveys households, Workforce Jobs insights are largely based on business surveys. It suggests the economy shed 182,000 jobs in Q2. When comparing this with the LFS and HMRC Payrolls data, it appears much of the decline came from jobs now classified as self-employed. Stripping out self-employment, the fall would have been just 24,000, which is more in line with recent payroll trends.

But, the UK job market is still weak

Zooming out from this detail, falling payrolls and a rising unemployment rate do clearly paint a picture of a weakening labour market. Fortunately, vacancies did rise for the first time in over a year. This suggests that firms are now past the worst of their adjustments to the big increase in labour costs from the last Autumn Budget and that the labour market should start to stabilise further going forward.

UK pay growth remains heightened and easing gradually

Turning to pay growth, private sector earnings excluding bonuses – the measure most important to the MPC because it’s most reflective of underlying inflationary pressures – fell to 4.7% in July from 4.8% in June. While it keeps pay growth on track to meet the MPC’s forecast of 4.6% in September, it’s well above the 3% level needed to return inflation to 2%.

Dovish MPC members will point to slowing pay growth when trying to justify a further interest rate cut this year. However, we still think pay growth will ease only gradually, ending 2025 at around 4%. Against a backdrop of chronically elevated inflation, we think the MPC would need to see bigger falls in pay growth to be convinced to press on with a cut in Q4.

Will the MPC make another interest rate cut this year?

Taking all the data together, the labour market looks like it’s starting to turn a corner. Indeed, employment is rising, payrolls are past their biggest falls and vacancies have started to rise again. In fact, we see no sign of the rapid weakening in the labour market that the doves on the MPC have repeatedly been concerned about.

This week’s LFS data further raises an already-high bar for another rate cut this year. With inflation heading to 4% in September, a recovering labour market and slow, yet steady, growth, we think the MPC will have little choice but to ensure inflation has peaked before voting for another cut.

Instead, we think the next opportunity for a rate cut will probably come in February. This is when inflation will be closer to 3% and the MPC likely feels confident that rising food prices haven’t prompted households to bargain for bigger pay rises, which would undo some of the disinflationary process.

All told, a stabilising labour market will ensure the MPC keeps rates on hold for the rest of the year while it confirms inflation has peaked and monetary policy won’t cause an unnecessary rise in unemployment.

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