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UK Employment and the BOE Rate Cut

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The UK will provide a barrage of data next week, as is its habit to get all the figures out at once. Before the markets open on Tuesday, the UK statistics office will release its latest review of the jobs numbers. There, the claimant count and the unemployment rate cut come under increased scrutiny in light of what recently happened with the BOE.

Unlike other central banks, the BOE has long fretted about wage pressures keeping inflation up. That could be because other central banks aren’t facing this “problem” as much. For most of the latest inflation spike in both the US and Europe, wages failed to keep up with consumer prices. But not in the UK, where low numbers of job seekers forced up labor costs.

The Possibility of Cuts

At the last BOE meeting there was a highly unusual triple split in the vote between raising, holding and cutting rates. The holds maintained the majority, of course. But the main takeaway was that the Monetary Policy Committee (MPC) members were willing to look at rate cuts given the current circumstances. Even the Governor, Andrew Bailey, said that the latest data points were moving in the “right direction”.

But the data isn’t there to convince enough members to vote for cuts. And, to be fair, the one member who did vote for cuts last time, Swati Dhingra, is something of an ultra-dove who resisted the rate hike cycle through most of its entirety. So, this opens the question as to what would be needed for the majority of MPC members to move from seeing things going in the right direction to actually reaching the destination?

The Labor Market is Key, Now

As inflation has come down, it is encountering more resistance to getting over the last bit needed to reach the target. The lackluster GDP growth in the UK isn’t the main driver of prices, rather consumer demand has held up despite the cost-of-living crisis. That is seen thanks to wages growing faster than inflation, keeping CPI from descending as fast as it has in other countries.

An additional compilation was added on Monday last, when the Office of National Statistics (ONS) provided its annual re-weighting update, showing that the unemployment rate cut was much lower than previously thought. The preliminary report showed trailing three-months to November unemployment at 4.2%, but the ONS then corrected it down to 3.9%. That would be well below what many economists consider the structural level.

What to Look Out For

In any case, the consensus among economists is that the unemployment rate will continue its slow rise, forecast to move back to 4.0% in December from the 3.9% reported previously. That would likely not be enough to convince many economists that a major shift has happened in the labor market, particularly if it doesn’t come with a slowing down in the average wage increases, a data point that will be published along with the claimant count and unemployment figures.

In any case, BOE Governor Bailey didn’t push back on the market’s expectation of four rate cuts this year. Rather, he emphasized policy easing was a matter of timing, not amount. Investors seem to be thinking the BOE will be slower to cut than the ECB and the Fed. In any case, there are further key data points coming out in the week to keep cable lively.

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