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Expectations for a rate hike had reached fever pitch walking into the meeting, so it was no surprise to see markets deflate a little when the result did not turn out as expected. Andrew Bailey, the governor of the BoE, made it clear in his press conference that the primary reason for inaction was the ongoing uncertainty surrounding the evolution of the UK labour market, so naturally all eyes turned to the 16 November jobs data to reveal which way the vote is likely to go in December.
October’s numbers are now in and show that the job market went from strength to strength in the first full month since the conclusion of the Job Retention Scheme. There are a few caveats to consider, but on the whole the data is surely going to go a long way towards shaping the City’s expectations for the final MPC meeting of the year, scheduled to conclude on 16 December.
Official data revealed that 1.14 million workers were still receiving retention scheme support during the month of September. What happened to those workers during October was the key highlight from the latest round of labour market data, which confirmed that worker demand remained strong last month, boosted by increases across sectors as diverse as healthcare, administration and hospitality.
The claimant count estimate of the unemployment rate dropped sharply, to just 4.3% in October. Had all those workers previously collecting retention scheme benefits been laid-off, the rate could have soared to as much as 8.0%, up from 5.2% in September. This would have made a rate hike almost impossible, irrespective of the prevailing rate of inflation.
The uncertainty surrounding this data was heightened by the fact that the September jobs report provided no indication that furloughed workers were going to be re-hired.
While this data suggests that they were, it could still take several months before employers’ intentions become clear as workers losing their jobs in early October may very well be receiving redundancy payments and thus not included yet amongst the ranks of the unemployed. This latest data provides no indication that redundancies increased at all, and indeed job vacancies hit a new record high at 1.17 million. Anecdotal evidence suggests that in such circumstances, firms are proving extremely unwilling to let trained workers go.
This stronger-than-expected data might lead one to believe that the reintegration of furloughed workers into the workforce might help address supply chain bottlenecks leading, in due course, to lower prices. However, the ongoing shortage of workers, especially in low-skilled, low paying jobs, might infer that the closure of the country’s borders to immigrant workers as a consequence of the fall-out from the Brexit process is continuing to have an adverse impact.
Despite what appears like a compositional adjustment in the UK workforce, serving to drive up average weekly earnings, monthly increases in CPI inflation remain in excess of gains in average wages. This is an overt demonstration of real wage pressures and a diminution in households’ standards of living.
So, how might the Bank’s rate-setting committee respond? Before a decision has to be taken, members will have another full suite of monthly data to inform them, most notably another monthly jobs report pertaining to November and scheduled for release on 14 December.
If that data marks a continuation of October’s strength, when coupled with inflationary pressure judged by the Bank itself to remain on a rising trend, it could prove impossible for the Bank to hold the line. Andrew Bailey is already on record as confirming that the Committee had been waiting for information pertaining to the country’s employment situation, and especially the impact of the furlough’s conclusion, before making a decision on base rates.
The reaction in the gilt-edged market and on the foreign exchanges, where sterling has strengthened in recent days, indicates that the City is increasingly building in the likelihood that UK base rates will rise sooner rather than later.
Jeremy Batstone-Carr is on Raymond James’ European Strategy Team