UK jobs market softening complicates Bank of England's rate decision

New official data showing a cooling jobs market has added complexity to the Bank of England's (BoE) decision on interest rates this week, as policymakers balance evidence of weakening labour demand against wage growth that remains above the rate of inflation.

The Office for National Statistics (ONS) said regular pay growth excluding bonuses fell to 4.8% in the three months to July, down from 5.0% in the prior quarter and the weakest rate since May 2022. Adjusted for the Consumer Prices Index, real regular earnings growth eased to 1.2% — the lowest since September 2023. Unemployment was unchanged at 4.7%, but there was an 8,000 decline in the number of payrolled employees in the month to July and vacancies fell by about 10,000 in the quarter to August.

The mixed signals complicate the BoE's task ahead of the Monetary Policy Committee meeting on Thursday, where it must reconcile efforts to drive inflation back to its 2% target with signs of weaker economic output and a softer labour market. The bank cut its policy rate from 4.25% to 4.0% in August, a move that exposed divisions among committee members and prompted an unprecedented second round of voting.

ONS director of economic statistics Liz McKeown said the labour market "continues to cool," but added that the "ongoing decline in vacancies appears to be slowing." Analysts said the details point to a market moving towards weaker demand for labour without yet registering large-scale job losses.

Martin Beck, chief economist at WPI Strategy, noted that policy changes earlier in the year — including April's rise in employer National Insurance contributions and an increase in the National Living Wage — had weighed on hiring, but signalled those pressures may be easing. "Even so, the jobs market looks weaker than at any time in recent years: vacancies are now below pre-pandemic levels, the unemployed-to-vacancies ratio is at a four-year high, and overall job numbers fell 0.5% in Q2 — the steepest quarterly drop since mid-2023," he said. "That softening demand for labour is feeding through to pay."

Market expectations are for the BoE to keep the base rate at 4.0% at this week's meeting, with some investors pricing out further cuts this year. Ranjiv Mann, senior portfolio manager at Allianz Global Investors, said the bank is likely to "sit on its hands on the policy front, wanting greater confidence that the inflation trajectory is on an improving path, as well as seeking some clarity on the fiscal front from the November Budget." He added that a more pronounced slowdown in growth or labour market activity could reopen the case for rate cuts later in the cycle.

Despite the easing in nominal pay growth, wages remain higher than CPI inflation, a dynamic that could continue to exert upward pressure on prices if sustained. Lale Akoner, global market analyst at eToro, described the combination as a "tough backdrop": "the labour market is softening, but inflation remains too high for the Bank of England to pivot dovish. That's a painful combination, households face slower wage growth just as higher food and energy bills bite, while firms cut back on hiring amid rising taxes. It's hard to see a near-term catalyst for stronger domestic demand, and the November budget could tighten conditions further."

Policy makers face a narrow path: further tightening risks deepening the slowdown, while easing too soon risks entrenching above-target inflation. With vacancies and hiring cooling but unemployment steady and wage inflation still elevated relative to consumer prices, the BoE's decision-makers must weigh short-term labour market softness against the longer-run trajectory of inflation and fiscal developments ahead of the autumn budget.

Markets will look to the committee's post-meeting statement and any minutes for guidance on the likely timing of further policy moves. Some investors continue to place a small probability on an additional 25 basis-point cut at the December meeting, but confidence in that timing has weakened amid persistent price pressures and uncertainty about domestic demand.