There are two big events for the pound scheduled this week. The first is tomorrow’s release of employment data, which will likely be the key deciding factor for the second event: the BOE’s interest rate decision on Thursday.
There is still no consensus on whether the BOE will hike or hold again. So, we could have a strong reaction in the market from the data and the decision, depending on what happens.
We should recall that the market wasn’t sure if the BOE would hike rates the last time, too.
Crucially, the BOE said the reason they didn’t move was that they wanted to see how the jobs market was evolving after the end of the government’s furlough scheme. Presumably, we’ll get that data tomorrow as well.
Keeping a positive outlook
The consensus among analysts is that there will be no major change in the employment trends in the UK.
This kind of implies that, if they are right, then the BOE would raise rates at their meeting. But, recently, even though the BOE – and Governor Bailey in particular – have talked tough about rates, they seem to always come up with an excuse to hold rates for another month.
So, we shouldn’t be all too surprised if the BOE postpones again. But, there might be a stronger market reaction to such a delay.
Before we get too ahead of ourselves trying to figure out what the BOE will do, let’s consider the data that they will most likely be reacting to.
The jobs situation in the UK has been steadily improving since the beginning of the year. But, it remains quite a bit away from pre-pandemic levels.
Of course, before the pandemic, the UK had record low unemployment, so it’s not reasonable for the BOE to keep easing in place until jobs numbers return to that level.
The levels that matter
In fact, following the last recession, the BOE started raising rates when unemployment reached 4.8% way back in mid-2016. The unemployment rate is currently five decimal points below that level.
So, the underlying conditions for a rate hike are there; the question is whether there are other circumstantial things, such as the furlough scheme or the threat of Omicron, that might cause another delay in the rate hike.
The UK October Claimant Count is expected to improve to -20K from -14.9K reported in September. Remember, this is the number of people seeking unemployment benefits, so the more negative the number, the better a sign it is.
On this basis, the unemployment rate is expected to tick down another decimal to 4.2% from 4.3% prior.
Where the problem could arise
The thing is, though, the BOE doesn’t have a dual mandate to care about employment. Their concern with job creation has to do with the impact that employment has on inflation.
In that sense, average earnings ex-bonuses are likely to be a better measure to figure out what the BOE will do. If wages are rising faster, it implies there is likely to be more inflation, and the BOE would want to prevent that.
If wages are rising more slowly, then the BOE is likely to see more room to hold rates steady.
UK October average earnings ex-bonuses are expected to come in at 5.1% compared to 5.8% in the prior reading. That suggests that wage increases could be slowing down, and that might mean less inflation in the future.
In other words, the lower this number, the more reason the BOE has to hold for another month.
