Unemployment in the UK edged up by 0.1% in August to 4.3%, in a sign the economy is slowing.
The employment rate was at 75.5%, versus 75.7% in the three months to June.
The rise in the jobless figure was in line with forecasts and will help ease inflationary pressure. It was not the only data point released though, and wage growth of 7.8% will concern the Bank of England. With bonuses factored in, the figure was 8.5%.
The mixed data picture means Bank governor Andrew Bailey and his colleagues face a finely balanced call on rates when they meet next week. While the headline inflation figure has been falling, it remains well above target at 6.8%, as of July.
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Further complicating the situation is the time lag under which monetary policy operates. It is challenging for policymakers to judge whether the tightening that has already been done will be enough to bring inflation back to 2% in due course, or not.
Overtightening monetary conditions carries the risk of causing an economic crash and deep recession. With rates now at 5.25% and the economy already showing some signs of weakness, the monetary policy committee will have to tread very carefully.
Hugh Gimber, global market strategist at J.P. Morgan Asset Management, commented: “Recent commentary from Bank of England officials has pointed to a committee that is increasingly wary about the risk of overtightening. The problem so far, however, is that the signals coming from the labour market have simply been too strong to justify a pause in rate rises. Today’s data paints that challenge in an even clearer light.
See also: Calastone: Equities funds shed £1.19bn in August as money markets soak up more cash
“This morning’s data makes another increase in UK interest rates highly likely next week, even despite some of the weaker growth numbers recently. The bigger question is about the path thereafter. The Bank will be reluctant to keep tightening if they’ve watched other central banks around the world hit pause. Yet if incoming data doesn’t turn definitively, another hike to a terminal rate of 5.75% is absolutely on the table.”
Tom Hopkins, portfolio manager at BRI Wealth Management, said: “Today’s reading is a clear indication that the UK labour market is continuing its softening trend as businesses continue to pull back on hiring and slowing their output under the strain of rising borrowing costs.
“Whilst most of the market is expecting a further 25 basis point rise in interest rates when the Bank of England next meeting on the 21st September, Andrew Bailey casted some doubt on these expectations with comments last week as the chances of interest rates being held at current levels grows.”
Janet Mui, head of market analysis at RBC Brewin Dolphin, also sees next week’s rates decision as a difficult call.
“The problem, and a big headache, for the Bank of England at this juncture is that wage growth remains very elevated, and that is a factor that the Bank judges to drive sticky core inflation,” she said. “With that in mind, today’s 8.5% total wage growth figure lends support to the hawks for a 25 basis point rate increase in September.
“While employment is in general a lagging indicator and wages lag payroll growth, the adjustments in wage growth in relation to a softening economic environment is taking a long time. This ultimately reflects the shortage of labour and unless there is a more painful adjustment in the economy it is difficult for wage growth to slow meaningfully.”
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