A make-or-break week for the upcoming Bank of England rate decision kicked off this morning with the release of UK labour market data that contained a few surprises.
Due to be followed by the publication of March CPI numbers tomorrow, these will be the last data prints before the results of the next MPC meeting are due to be announced on May 11th. Whilst there were substantive upside surprises in both the wage and employment figures, this came alongside an uptick in the unemployment rate. Taken together at first glance, the data provides a muddied signal for markets, one that doesn’t necessarily clarify whether the BoE will indeed hike again at their next meeting or not. However, looking into the report’s details a bit further, the signal is a bit clearer for the BoE. The 169k increase in employment in the three-months up until February was largely driven by a 134k increase in those self-employed, while for payrolled employees the number of full-time positions actually fell by 93k. This meant that the 18k net employment increase was ultimately driven by a 111k increase in part-time workers. Meanwhile, despite the wage figures beating expectations, more timely estimates such as the annualised 3m/3m rate showed wage pressures are continuing to slow.
While on a surface level the data doesn’t necessarily provide the BoE the perfect cover to hold rates at their next meeting, and as such we are unlikely to see OIS pricing fall from the current 80% probability of a hike, we think there is enough evidence within the details of the report to give the BoE some confidence that previous monetary actions are now starting to recalibrate the labour market.
At first glance, a modest increase in unemployment in February, which ticked up to 3.8%, an increase of 0.1% on the January number and above expectations that it would remain at 3.7%, would seem to be just what the Bank of England was looking for. Combined with the 3M/3M employment change showing an increase of 169k, against an expectation of just 50k and a previous reading of 65k, it would suggest labour supply issues are beginning to ease, with the UK economy adding jobs faster than expected at the same time as unemployment is beginning to trend back to more sustainable levels. This view could be further supported by the estimates for the employment rate, which came in at 75.8% in December 2022 to February 2023, 0.2% higher than between September and November 2022, and with the inactivity rate falling by 0.4% to 21.1% over the same period, although both measures remain just less than 1% off pre-covid levels.
Digging a little deeper, signs that the rise in employment was largely attributable to an increase in part time workers, suggesting some slack is beginning to emerge in the UK economy, another positive sign for the BoE.
However, the biggest surprise came in wage data, where both average weekly earnings and weekly earnings ex-bonus beat expectations by some margin. Having been expected to fall by over half a percent, the weekly earnings number for February instead printed at 5.9%, in line with a January release that was also revised upwards from 5.7%. The same story was true when stripping out bonuses, with the measure showing an increase of 6.6%, again with no change on an upwardly revised figure for January. Whilst the headline measures ring cause for concern for a BoE that is looking for wage pressures to moderate, the three-month on three-month annualised rate of wage growth, which is specifically highlighted by the BoE in its recent meeting minutes, has fallen from 6% in January to 5.6%. This, alongside signs that labour demand is cooling, should provide the BoE with enough comfort that the labour market is gradually normalising.
Whilst there are positive signs within the latest labour market report, the data released today doesn’t unequivocally support a hold from the BoE at the next meeting.
In this context, tomorrow’s CPI reading is likely to take on even greater significance. With last month’s print having unexpectedly risen to 10.4%, both markets and policymakers will be waiting to see if tomorrow’s release confirms an upturn for inflation or a return to the disinflationary trend. Barring an upside surprise in CPI tomorrow, in our view, this morning’s release does still contain enough evidence for the Bank of England to hold rates in May, and wait to see how economic conditions develop as the impact of monetary tightening continues to weigh on the economy.
Simon Harvey, Head of FX Analysis
Nick Rees, FX Market Analyst