Bank Of England: Jobs data supports steady policy – ING

ING economist James Smith argues that recent United Kingdom (UK) jobs data underline a cooler labour market and weaker wage dynamics, reducing the risk of another inflation surge. He notes that private sector wage growth aligns with the Bank of England’s 2% inflation target, and ING’s base case is for the Bank of England (BoE) to keep interest rates on hold into next year despite higher energy prices.

Cooler labour market tempers inflation risks

"All of this goes hand in hand with the weak wage growth we’re seeing. Admittedly, private sector wage growth looks like it has reached a floor of 2.9% – or around 3.3% when so-called compositional effects are stripped out."

"Still, the basic story is unchanged. Wage growth across the private sector is consistent with a medium-term inflation target of 2%, judging by the Bank of England’s own analysis earlier this year."

"In short, the fact that the UK jobs market is far, far cooler than it was when the Ukraine shock hit four years ago, means we’re much less likely to see severe second-round effects on inflation from higher energy prices. This is a point that the Bank of England’s doves appear to be becoming increasingly confident about."

"So while a rate hike can’t be ruled out later this year if energy prices stay high, we expect another 6-3 vote to keep rates on hold this week, and we’re not convinced we’ll see a wholesale hawkish pivot on the committee this time around."

"Today’s jobs report is yet another reminder that the UK economy is far less susceptible to another long-lasting inflation wave. Though a rate hike can't be ruled out if energy prices stay high, our base case is for the Bank of England to keep policy on hold into next year."