If markets are right, we may only be a matter of weeks away from the first Bank of England rate hike. That’s undoubtedly bold, but at face value there’s little in the latest UK jobs report that will sow any fresh seeds of doubt in the minds of investors.
Hiring demand is clearly strong, and the rebound in employment in the hardest-hit consumer services sectors continues apace. Wage growth is around pre-virus levels, if ONS estimates of underlying trends are to be believed. And so far, there’s no discernible increase in redundancies ahead of the furlough scheme ending.
Consumer services employment is rapidly recovering
Still, we suspect caution will prevail at November’s Bank of England meeting. True, there hasn’t been much push back from MPC members in light of recent market pricing. But before hiking the Bank will want to be sure that a) wage growth is going to be sustained and more importantly, widespread, and b) that the furlough scheme hasn’t resulted in a material increase in jobs market slack.
The reality is that policymakers are unlikely to have the answer to either question before the next meeting.
Redundancies aren’t yet picking up based on ONS weekly data
On the question of the furlough scheme, we suspect the Bank of England may be too optimistic in assuming that the unemployment rate won’t increase over coming weeks. Around 2% of employees were likely still furloughed for all of their usual hours when the scheme recently ended, and three-fifths of staff on the scheme were in small businesses. We suspect this partially reflects a lack of confidence among smaller firms to return to their pre-Covid workforce size.
We’d also note that those furloughed just before the scheme ended appeared to be much more evenly dispersed across sectors than earlier in the pandemic – and it appears some industries have managed to return to pre-virus levels of economic activity with smaller workforces.
In short, it’s an uncertain backdrop in the jobs market. At a time when the cost of living is increasing sharply – and inflation is set to be at or above 4.5% next April – it’s likely that real wages will be flat, or indeed negative for many workers over the winter.
For now, we’re pencilling in the first rate rise for May 2022, but we accept we may soon need to bring that forward depending on what Bank of England speakers say about market pricing over the coming few days.
Furloughed workers were dispersed across a number of sectors
Source: ING