United Kingdom: Wage momentum complicates the BoE outlook - Nomura

Nomura’s Josie Anderson, George Buckley and Andrzej Szczepaniak say the latest UK labour data show strong private sector pay but softer employment, with payrolls falling and vacancies at their lowest since early 2021. They expect the Bank of England to keep rates unchanged this week, but warn that persistent wage strength and higher energy prices could still force future hikes.

Strong wages, softer jobs, steady BoE

"This report did little to challenge our view that the BoE will leave rates unchanged this week. However, if the pick-up in private sector regular pay growth since the spring persists, it would likely elicit concern among policymakers, as risks of second-round inflation effects from the Iran war will be at the forefront of rate setters’ minds."

"Private sector regular pay rose by 0.3% m-o-m in July, following the upwardly revised 0.45% print in June and above our forecast of 0.2% m-o-m. While still not too far from the 0.2% to 0.25% m-o-m we’d like to see it running at (which was where it was on average in the two decades to 2019), faster wage growth is a key metric to monitor second-round inflation effects."

"On the negative side, payrolls fell by more than we were expecting (-26k versus our forecast of -10k), and there were negative revisions for the previous three months. This series, however, is very prone to revision, so we cannot put too much weight on a single print."

"We expect no change in rates from the Bank of England (BoE) this week. Recent BoEspeak suggests the majority of the MPC will not vote for a hike (we expect another 6-3 vote in favour of rates on hold, with Pill, Greene and Mann continuing to vote for a 25bp rate hike)."

"However, beyond this week’s Bank Rate decision, risks are rising that monetary policymakers may need to raise interest rates in response to higher energy prices. Further strong private sector regular pay growth prints would add to the reasoning for hikes, so they are worth watching for closely."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)