UK Wage Growth Suggests Another Rate Hike, but the Jobless Rate Rises.

In a complex economic landscape, the Bank of England faces a critical decision regarding interest rates. As recently released statistics indicate a cooling labor market, the Bank is poised to implement another rate hike, possibly the last in the current cycle. This article explores the dynamics behind this decision, the factors at play, and the potential consequences.

Understanding Wage Growth

Wage growth is a crucial metric for assessing the overall health of an economy. In the three months leading up to July, the Office for National Statistics (ONS) reported a notable increase in average weekly wage growth in the United Kingdom. The figures climbed to 8.5% in annual terms, a slight uptick from the previous month’s 8.4%, and a record high not seen in over 20 years, once the COVID-19-related distortions were excluded. This robust wage growth can be attributed to several factors, including increased demand for labor and inflationary pressures.

Implications for Interest Rates

With wage growth at record levels and the UK grappling with the highest rate of inflation among major advanced countries, most investors anticipate that the Bank of England will raise interest rates once more. This move is expected to take place on September 22, with rates potentially reaching 5.5%, up from the current 5.25%. The central bank sees this as a necessary step to curb inflation and maintain economic stability.

However, the decision to hike rates is not without its challenges. The recent data on the labor market paints a mixed picture.

Labor Market Challenges

1. Decline in Employment: One concerning aspect is the significant drop in the number of employed individuals. In the three months leading up to July, 207,000 people lost their jobs, including a substantial reduction of 182,000 in London, marking the largest decline since October 2020.
2. Youth Unemployment: The situation is equally grim for young workers aged 16–24, with 176,000 job losses in the three months preceding July, the second-largest decline in this demographic’s employment history.
3. Unemployment Rate: The unemployment rate also increased to 4.3% in the three months ending in July, up from 4.2% the previous month. This rise marks the highest level since September 2021 and exceeds the Bank of England’s earlier projection for the third quarter of 2023.

The Dilemma of the Bank of England

While the need to combat inflation is pressing, the central bank faces a dilemma. The labor market’s challenges, including rising unemployment and declining employment among young people, are causes for concern.

Hugh Gimber, a global market strategist at J.P. Morgan Asset Management, points out that the bigger question lies in the path ahead. If central banks worldwide are hitting pause on their tightening measures, the Bank of England may be hesitant to proceed.

The Road Ahead

The Bank of England’s decision to raise interest rates is fraught with complexity. While inflation remains a significant concern, the precarious state of the labor market adds a layer of uncertainty. The central bank’s choice on September 22 will be closely monitored, and its future moves will depend on incoming data.

As BoE Governor Andrew Bailey emphasized, borrowing costs may still need to increase due to persistent inflation pressures. The central bank finds itself in a balancing act between addressing inflation and supporting the labor market.

In conclusion, the UK’s wage growth suggests another rate hike is on the horizon, but the rise in the jobless rate raises questions about the long-term economic outlook. The Bank of England faces a challenging decision as it seeks to strike a delicate balance between inflation control and labor market stability.