UK wages Preview: Solid wage growth and tight labor market keeps rate hike chances high

The Bank of England Governor Mark Carney and the Deputy Governor Jon Cunliffe are both set to be testifying before the Treasury Select Committee of the UK parliament on the Financial Stability Report while the UK labor market report is likely to deliver the wage growth of 2.7% y/y excluding bonuses, 2.5% y/y wage growth when bonuses are included, the unemployment rate stagnant at 4-decade of 4.2% and the claimant count at 2.3K in June after unexpectedly falling by 7.7K in May, the report from the Office for National Statistics is set to disclose on Tuesday, July 19 at 8:30 GMT.

Even with numbers missing the forecast a bit, the Bank of England policymakers are pretty convinced that this it the right time to deliver the rate hike after lifting the Bank rate from an all-time low of 0.25% last November.

There are clear reasons for the Bank of England to deliver. The UK labor market is tight, and although they continuously highlight data dependency of their decision making, last voting decomposition from June saw the Bank of England chief economist Andy Haldane joining the hawkish camp of Ian McCafferty and Michael Saunders voting in favor of a rate hike. 

This is regardless of continuous wait-and-see approach pursued from other officials including the Bank of England Governor Mark Carney. With inflation being the main policy target only strong and long-lasting deviation from the expected path of the UK wage growth is likely to derail the Bank of England from raising the Bank rate on August 2 this summer.

Related reports

• UK labor market remains tight as wages rise less than expected
• The Bank of England Governor Carney optimism about growth makes rate hike chances clearer
• The UK monthly GDP rises 0.3% confirming the Bank of England improved growth outlook

The scenario of wages deviating strongly from the central market expectations is unlikely due to the improved growth picture in the UK of late. The monthly GDP published last week met the expectations with GDP growth rate of 0.3% in three months ending in May driven by UK services sector.

The UK services increased 0.4% in the three months to May and had the biggest contribution to GDP growth. However, contraction in the production and construction industries meant that they each had negative contributions to GDP.

In his last public speech, the Bank of England Governor Mark Carney confirmed the message from the June meeting of the Monetary Policy Committee (MPC) saying “the incoming data have given me greater confidence that the softness of UK activity in the first quarter was largely due to the weather, not the economic climate.”

On the top of it, Carney also confirmed readiness to act on rates as soon as this August saying the policymakers will have enough information about the evolution of the UK economy even after the Office for National Statistics (ONS) rescheduled its macro data release calendar. 

The UK wage growth