A solid UK employment report supports the decision to hike rates

Faster-than-expected wage growth in the UK points to an interest rate hike in June and potentially in August, and is a reminder that wage pressures are likely to ease only gradually. This doesn't necessarily mean the Bank of England needs to raise interest rates as aggressively as markets expect, but it does mean rate cuts are a distant prospect.

The pace of wage growth is not slowing down

The latest UK employment report is undeniably hawkish for Bank of England.

The unexpected drop in the unemployment rate to 3,8%, which is still close to all-time lows, highlights the overall resilience of the labor market at the moment. By the way, there are still some signs of cooling, with vacancies lower and layoffs higher, although both indicators still look better than long-term averages.

Most importantly for the Bank of England, we have also seen another clear pick-up in wage growth, both compared to the last three months compared to the previous three months, and compared to the same period last year. By contrast, regular pay has increased by £4 over the last month, which compares to an average of £3-4 monthly increases in the second half of 2022. In other words, wage growth is not necessarily accelerating, and it is indeed unlikely that the annual growth rate (currently 7,2%) will increase significantly due to base effects. But it is also clear that wage growth is not falling either.

Employment difficulties

Admittedly, survey data suggests companies are looking to raise wages less aggressively in the coming months, with a BoE survey of CFOs pointing to a clear slowdown in wage growth in the coming months

Labor shortages appear to have eased, with the number of inactive workers (neither employed nor actively seeking work) decreasing in recent months. Nevertheless, it appears that some of the reasons for the difficulty of finding employment during the pandemic are structural. This is clearly demonstrated by the further increase in the number of workers outside the labor market due to long-term illnesses.

June hike almost certain

For the Bank of England, all of this cements a June rate hike, and if inflation figures continue to be strong, it's quite likely we'll end up with an August move as well.

Much will depend on how it turns out CPI inflation in the next few months.

The reality, however, is that UK interest rates are currently in quite restrictive territory and the scale of price tightening in the markets - an additional 120bps - may be exaggerated.

The next meeting of the Bank of England will take place on June 22 and then the next decision on interest rates will be taken.