The Bank of England faces a dilemma later this week according to experts after data from the Office for National Statistics (ONS) has shown the unemployment rate for the quarter from August to October rose by 0.1 percentage points to 3.7%.
Economists are watching labour market data closely, as a growing unemployment rate is a strong indicator for an upcoming recession and might ease the pressure on the Bank of England (BoE) to hike interest rates, as it is set on doing this Thursday.
Today’s figures are unlikely to move the needle much, and couples with data from earlier this week, when the UK economy surprised with a positive 0.5% bounce in GDP.
According to Marcus Brookes, chief investment officer at Quilter Investors, this morning’s UK unemployment data highlighted the dilemma facing the BoE ahead of their rate-setting meeting this week.
“With the BoE already fearing the country is in a recession, labour market conditions remain tight with fewer foreign workers and increased hesitancy among people to take up new roles due to increased economic uncertainty,” he said.
“With employment remaining lower than it was before the pandemic, the UK is badly lagging its peers in developed economies and may be in need of a policy boost to fix its labour market conundrum and get more people who are economically inactive back into work.”
Wage growth also picked up 6.1%, which isn’t necessarily good news, as it will reinforce the strong inflation pressures in the economy, Brookes argued.
“We expect the monetary policy committee (MPC) to raise rates by 0.5 percentage points on Thursday, but the pace of rate hikes is likely to slow from now on given the weakening economy.”
Modupe Adegbembo, G7 economist at AXA Investment Managers, agreed, noting that there are signs in the ONS report that slack is slowly emerging in the labour market.
“But evidence will not be enough for the MPC to be confident that price pressures will not prove persistent, particularly as wage growth remains buoyant. Signs that labour supply which has remained constrained and added to labour market tightness is beginning to ease is positive but at this stage only initial,” he said.
“We continue to expect the MPC to hike the bank rate by 50 basis points at their December meeting on Thursday, while also pencilling in a 50 basis points hike in February and 25 points in March, with rates peaking at 4.25%.”
For Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, weakness is showing up in the ONS report, especially if one considers the decline in the number of job vacancies, which fell by 65,000, the fifth consecutive monthly decline.
“Companies are clearly nervous about the incoming recession and are starting to batten down the hatches as the storm brews. More people are leaving the inactive masses, but the overall rate remains stubbornly high,” she said.
“With the fight for talent easing a little though, it’s welcome news on the inflation front as this may start to dampen down wage demand spiral, which the Bank of England fears could become embedded in the economy. But with the UK still in the grip of strikes, and the clamour for higher pay still so being heard so loud, this will take time to filter through.”