Labour market cools ahead of possible rate cut in spring

Britain’s labour market continues to cool at a steady pace. Unemployment remains stuck at essentially a decade high once the COVID-19 period is excluded, while payrolled employment shrank by an alarming 43k in December. This represents the biggest monthly downturn in jobs since the HMRC data was first published in 2014, again once discounting the pandemic.

We expect the Bank of England to remain on hold for at least the next couple of meetings, but today’s data may well encourage the MPC to lower rates in the spring. The hawks on the committee have long emphasised upside risks to UK inflation, but these arguments are losing steam amid the deteriorating employment picture and the moderation in wage pressures.

All eyes now turn to tomorrow morning’s critical inflation report for December. Any signs of a further easing in price growth could bring an April rate reduction into sharper focus, while leaving the door open to another cut later in the year. If confirmed, this would likely keep the pound on the back foot in the second half of the week.