Today’s market analysis on behalf of Michael Brown Senior Research Strategist at Pepperstone
17th December 2024
The October UK labour market report pointed to employment conditions holding broadly steady over the three month reference period.
Unemployment was unchanged at 4.3%, for the second straight month, though the Labour Force Survey remains unreliable and likely inaccurate, as the ONS continue to grapple with data quality issues, which rather farcically may not be fully fixed until 2027. Hence, policymakers continue to place little weight on the figures, or on the labour market as a whole, with focus remaining firmly on inflation developments.
Meanwhile, earnings pressures intensified over the survey period, with regular pay rising 5.2% on an annual basis, while overall earnings also rose at the same pace. Both rates, clearly, are incompatible with a sustainable return towards the 2% inflation target over the medium term, with the acceleration in earnings growth in October caused principally by an unfavourable base effect from 2023, coupled with this summer’s above-inflation public sector pay deals feeding into the data, with this latter factor also likely to skew the November print to the upside. Policymakers will clearly be seeking a significant cooling in earnings pressures before being convinced that the risk of persistent price pressures is receding, and that sticky services inflation may begin to ease.
Overall, though, the report shan’t be a game-changer for the Bank of England’s Monetary Policy Committee, who are set to hold policy steady, maintaining Bank Rate at 4.75%, at this year’s final announcement on Thursday.
Continued uncertainty over the precise impact of the measures announced in October’s Budget, coupled with stubbornly high inflation, and accelerating earnings growth, help to reinforce the MPC’s ‘gradual’ approach to removing policy restriction. As such, a 25bp cut in February, with quarterly cuts thereafter, remains my base case.
Risks to this view, however, are tilted to a more dovish outturn, particularly if the labour market were to loosen more rapidly, as businesses react adversely to the National Insurance hike, and threshold lowering, both of which substantially raise the cost of employment. Increased labour market slack, and the potential downward pressure this could exert on sticky services inflation, could force the MPC into more aggressive action from the second quarter of next year onwards, quickening the pace of Bank Rate cuts.