UK Unemployment Rate Preview: Negative real wage growth set to anchor rate hike expectations

The unemployment rate in the UK is expected to remain flat in September at 4.3%, the lowest level in 42 years. Also the employment rate is positive, having risen to at all time high in August. With the labor market report due in the UK on Wednesday at 10:30 am, the key issue is the closely watched wage growth.

The wage growth is expected to also remain steady at 2.1% y/y and such development is worrying for the policymakers at the Bank of England, because with inflation at 3%, real, inflation adjusted income in the UK is putting further pressure on consumers. Moreover, with negative real income consumers in the UK can afford to buy less goods putting the prospects of future economic growth in jeopardy. Especially as the UK economy approaching its potential output, closing the output gap. 

“Wage growth has been very, very weak” the Bank of England external MPC member Silvana Tenreyro, the London School of Economics professor said during the appointment hearing at the Treasury Select Committee on Tuesday.

Silvana Tenreyro will join the rate setting MPC, replacing the US economist Kristin Forbes who departs the Bank of England at the end of this month and has been persistently voting in favor of rate hike.

As an economics professor Tenreyro strengthened the case of sensitive rate hike expectations pointing to narrowing of the output gap. “We are approaching a tipping point when it will be necessary to remove stimulus” Silvana Tenreyro said at the parliamentary hearing on Tuesday. 

The general market view is that the Bank of England will hike it Bank rate by 0.25% to bring it back to pre-Brexit low of 0.50%, a level of Bank rate dwelling for a long time.

“Whilst we think a November rate hike is highly likely, for now we think the lack of domestically generated inflation combined with a sluggish growth outlook (and don’t forget all the noise surrounding Brexit) mean that any subsequent tightening is likely to be very limited,” analysts from ING wrote in their market commentary on Tuesday.

GBP reaction

Labor market data are very market sensitive data in case of sterling and in the post-Brexit environment are together with inflation data the most relevant for the forex market.

In case of September labor market report, the GBP/USD is unlikely to be moved much with data coming in in line with expectations or even deviating from expectations slightly, because the November rate hike expectations are well anchored.

Even the CPI data released on Tuesday have had little impact on sterling. 
“This can probably be explained by the fact that a November  hike has already been widely discounted by the markets and today’s rise was consistent with expectations and therefore it doesn’t come as too much of an upside shock” David Cheetham from XTB Brokers UK wrote after the report was made public.

With GBP/USD currency pair trading well above $1.3200, it is the rate hike that is bolstering the pair rather than macro data released in the runup to November 2nd rate setting meeting of MPC that will also publish its quarterly Inflation report macro forecasts.