Market Analysis

British pay grew at its slowest pace in over two years in the three months leading up to August, and job vacancies continued to decline, according to official data. This trend will likely be welcomed by the Bank of England (BoE) as it considers the timing of its next interest rate cut.

The Office for National Statistics (ONS) reported that average weekly earnings, excluding bonuses, were 4.9% higher compared to the previous year in the three months to August. This figure aligns with economists’ median predictions, as surveyed by Reuters.

After the data was released, the British pound remained relatively stable against the U.S. dollar, and investors continued to bet on an interest rate cut in November. Market indicators suggest an 80% likelihood of a quarter-point reduction on November 7.

In August, the BoE reduced borrowing costs but opted to hold rates steady in September, stating that it wanted more evidence of easing inflationary pressures.

Wednesday’s data is anticipated to show that the UK's consumer price index dropped to 1.9% in September, falling below the BoE’s 2% target. However, core inflation is expected to remain strong, according to Reuters' poll of economists.

"For now, another rate cut in November seems highly likely, and the upcoming budget will help shape the outlook for further rate adjustments," said Luke Bartholomew, deputy chief economist at asset management firm abrdn.

The government’s first tax and spending announcement is set for October 30, with Finance Minister Rachel Reeves refusing to rule out a possible increase in employer social security contributions. This has led the opposition Conservative Party to accuse her of planning a "jobs tax."

Recent ONS data has indicated a cooling of the inflationary pressures in the labour market that intensified during and after the pandemic, when employers raised wages to attract and retain staff.

Private sector wage growth, excluding bonuses, slowed to 4.8% in the three months to August, aligning with the BoE’s forecast of a 4.8% increase for the third quarter.

In addition to slowing wage growth, job vacancies in the UK dropped by 34,000 in the three months to September, reaching 841,000—close to pre-pandemic levels.

The ONS also reported a further decrease in the unemployment rate, which fell to 4.0% in the three months to August, marking the lowest rate this year, alongside a record rise in employment.

However, the ONS has cautioned that the Labour Force Survey (LFS), which measures employment and unemployment, may be overestimating employment growth due to declining response rates. The agency noted that unemployment may not have fallen as much as the headline figures suggest.

Paraphrasing text from "Reuters" all rights reserved by the original author.