UK labour market: falling unemployment rate means no rate cut next week

A further slowdown in regular private sector pay growth in the three months to July, down to 4.9%, the slowest rate since April 2022, should go a long way to easing some of the concerns on the Monetary Policy Committee (MPC) about strong wage growth stoking inflation. But it won’t be enough to persuade the MPC to cut rates again next week. The drop in the unemployment rate to 4.1% and the big 265,000 jump in employment suggests the labour market is tightening again, which risks wage growth remaining higher for longer. 

UK labour market recovering 

The labour market looks like it is continuing to recover after last years mini-recession. Vacancies maintained their downward trend, falling to 857,000 in the three months to August, the lowest since May 2021. That compares with a peak of around 1.3 million in mid-2022 and brings job openings a little closer to their 2016-19 average of about 800,000.

Employment grew by a punchy 265,000 in the three months to July, compared with the previous three months, which was enough to bring the unemployment rate down to 4.1%, despite a 112,000 rise in the number of inactive people. 

The labour market data is still unreliable and looks erratic on a month-to-month basis, so it’s better to look at the broader trends. The big picture is that the labour market is stabilising. Vacancies are trending down but employment now seems to be picking up a bit. 

Pay growth slowing 

The message from the pay figures is clearly that things are easing. Regular private sector pay growth, the measure most closely watched by the Bank of England (BoE), dropped from 5.4% to 5.1% in July. The bulk of the decline was driven by April’s near 10% increase in the National Living Wage dropping out of the three-month measure. The reading is confirmation that any spillover effects from that on pay differentials have been contained so far.

Wage growth should continue to trend down over the rest of this year as 2% inflation is factored into pay settlements.

Just as importantly for households, real wages grew by 2.2%. That, combined with rising consumer confidence should give a boost to consumer spending in the second half of this year, helping a consumer spending driven recovery.

The policy outlook 

Alongside the decision to cut rates last month, Governor Andrew Bailey delivered the message that the Bank shouldn’t cut rates “too quickly or by too much”. That view is unlikely to have changed following the latest jobs and pay data.

The BoE is entering a tricky time where services inflation is likely to continue to trend downward, but headline inflation is going to temporarily rise. That will create challenging optics for the central bank as it considers how quickly to reduce the restriction in its policy stance. 

Our base case is that it will lower rates again in November. Another cut next week looks unlikely with financial markets giving it just a 17% chance. 

If wage growth does continue to fall over the rest of this year then it would give the MPC ample cover to cut rates again towards the end of the year, probably in November, and then be more aggressive in its rate cutting cycle in 2025. We currently have four cuts pencilled in for next year.

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