Harvest Global Markets :

Recent economic data has thrown the Bank of England into a quandary as it grapples with decisions regarding further interest rate increases. The latest unemployment and wages numbers have not only given the central bank a headache but can be likened to a financial migraine. With the unemployment rate reaching its highest point since October 2021 at 4.2%, and wages growth soaring in June, the Bank of England faces a challenging landscape to decide on its monetary policy. The unemployment rate’s rapid ascent to 4.2%, coupled with remarkable wage growth in June, has put the Bank of England in a tight spot. Average weekly earnings for the 3 months leading up to June soared to a record-breaking 7.8%, with the previous month, May, revised upward to 7.5%. When including bonuses, wages surged by an astonishing 8.2%, a figure that surpasses core CPI inflation. This surge was primarily propelled by one-off NHS bonus payments made in June, which are unlikely to be replicated.

The wage growth phenomenon was characterized by a 6.2% increase in public sector pay and an even more substantial 8.2% rise in private sector wages during the same 3-month period. This trend has further intensified the pressure on the Bank of England to implement another 25 basis points rate increase at its upcoming September meeting. While the surge in wage growth and potential rate increases might be concerning, it’s essential to consider the broader context. The UK employment rate saw a decline to 75.7%, still trailing 0.8% below its pre-pandemic peak. Simultaneously, the economic activity rate dropped slightly to 20.9% for the quarter, accompanied by a decrease in total hours worked. These signs of weakness in the labor market present a counterbalance to the wage growth surge. Despite the call for further rate increases, the Bank of England must approach this decision with caution. Although the current trajectory implies a September hike, it’s imperative to consider long-term trends and the direction in which inflation is heading.  Amid these economic fluctuations, it’s important not to overlook the impact on consumers. While some may criticize the robust wage and employment numbers as precursors to a wage/price spiral, there’s a significant aspect that can’t be ignored. Consumer incomes have been under pressure for months, and the gap is finally narrowing, offering some relief. This trend is expected to persist as wage growth gradually slows and falling CPI stabilizes, providing consumers with respite from the financial constraints of the past year and a half.

The current economic landscape is a complex tapestry of promising wage growth, heightened inflationary pressures, and signs of labor market fragility. The Bank of England faces the unenviable task of determining the optimal monetary policy path, balancing the need for rate increases with the reality of potential economic downturns. The surge in wage growth and unemployment figures has heightened expectations of a rate hike in September, but the central bank must remain vigilant about the broader economic trends and potential repercussions. While the impulse might be to address every challenge with rate increases, history has shown that such an approach might not be universally effective. In the end, the Bank of England’s decision should be grounded in a nuanced understanding of the ever-evolving economic landscape.