UK jobs wobble deepens Bank of England’s rate dilemma ahead of MPC meeting
Vacancies fall again and wage growth eases to lowest since May 2022, but pay remains above inflation as markets await Thursday’s decision
New figures from the Office for National Statistics on Tuesday added to the Bank of England’s policy dilemma ahead of this week’s Monetary Policy Committee meeting, showing a further cooling in the labour market even as wages remain above the rate of consumer price inflation.
Regular pay growth excluding bonuses fell to 4.8% in the three months to July, down from 5.0% in the previous quarter and the weakest pace since May 2022. At the same time, vacancies continued to slide, payrolled employment fell by 8,000 in August, and the unemployment rate held steady at 4.7%.
The ONS said real earnings growth, which adjusts regular pay for the Consumer Prices Index, eased to 1.2% — the lowest since September 2023 — reflecting slower nominal pay rises and still-elevated inflation. Vacancies fell by 10,000 in the quarter to August and are now below pre-pandemic levels, the ONS added.
Liz McKeown, director of economic statistics at the ONS, said the labour market "continues to cool" but that the pace of decline in vacancies "appears to be slowing." Official data also showed the unemployed-to-vacancies ratio at a four-year high, and overall job numbers declined 0.5% in the second quarter — the steepest quarterly drop since mid-2023.
The numbers complicate the Bank of England’s task of steering inflation back to its 2% target. Wage growth remaining above CPI could sustain inflationary pressure, arguing against an immediate interest-rate cut. Conversely, weaker hiring and falling vacancies point to softer demand in the economy that might support looser policy.
Governor Andrew Bailey and other members of the MPC will weigh those trade-offs at the committee meeting on Thursday. Markets currently expect the Bank to hold the base rate at 4% this week after the MPC cut the benchmark from 4.25% to 4% in August. That August meeting produced an exceptionally fractious vote sequence, with a second round of voting required for the first time in the Bank’s history.
Economists said recent tax and wage decisions have weighed on labour demand but that pressures may be easing. Martin Beck, chief economist at WPI Strategy, pointed to April’s rise in employer National Insurance and a sharp increase in the National Living Wage as factors that had "clearly weighed on hiring," and said the latest data suggest some of those pressures are beginning to ease. He added, however, that the overall picture remains the weakest seen in recent years.
Market strategists warned the outcome remains finely balanced. Ranjiv Mann, senior portfolio manager at Allianz Global Investors, said investors expect the Bank to "sit on its hands" for now, seeking clearer proof that the inflation trajectory is improving and greater fiscal clarity ahead of the November Budget. Mann noted that if growth and labour market activity decline further, the Bank could re-introduce stronger expectations of rate cuts later in the cycle.
Lale Akoner, global market analyst at eToro, said the data underline a difficult mix for households and policymakers: "the labour market is softening, but inflation remains too high for the Bank of England to pivot dovish." She warned that slower wage growth combined with persistent food and energy costs would squeeze household incomes while higher taxes could further cool demand.
While many market participants still see a chance of a 25 basis-point cut at the December MPC meeting, speculation has grown this month that the Bank may not cut rates again this year if inflation proves stickier than policymakers expect.
Policymakers will monitor upcoming readings on pay, vacancies and inflation, as well as fiscal announcements, for signals on the outlook. The November Budget and the next rounds of labour market and CPI data will be central to shaping the Bank’s path on interest rates in the months ahead.
