U.K. unemployment rose in September, but wage growth slowed

The UK's unemployment rate unexpectedly climbed to 5.0% in September, while pay growth, excluding bonuses, decelerated to 4.6%, suggesting a cooling labor market. This data, alongside a survey indicating future wage expectations of just 3% and weak hiring intentions, could provide the Bank of England with greater flexibility to cut interest rates, despite inflation remaining elevated at 3.8%. Analysts, including ING, believe the market is underpricing the likelihood of a 25 basis point rate cut by the BoE in December, especially given that four policymakers already voted for such a reduction last week.

Analysis

The UK labor market exhibited signs of cooling in September, with the unemployment rate unexpectedly climbing to 5.0%, exceeding the prior month's 4.8%. Concurrently, pay growth, excluding bonuses, decelerated to an annual 4.6%, down from 4.7%, while a survey indicated future wage expectations of only 3% over the next 12 months, reflecting weak hiring intentions.

These developments provide the Bank of England (BoE) with increased flexibility for monetary policy adjustments, despite September's 3.8% inflation rate remaining nearly double its 2% target. The recent BoE meeting saw four of nine policymakers vote for a 25 basis point rate cut, suggesting internal momentum for easing. ING analysts believe the market is currently underpricing a December 25bp cut, assigning it only a 60% probability.

Further economic headwinds are anticipated from the Labour Party's potential fiscal policy shifts, with Chancellor Rachel Reeves hinting at breaking tax pledges ahead of a "difficult" November 26 budget. This prospect of increased taxation, coupled with the weakest hiring intentions since the pandemic, particularly in the public sector, could further dampen economic activity and corporate sentiment.

Key Decisions for Investors

• Investors should closely monitor the Bank of England's December meeting for a potential 25 basis point rate cut, as current market probabilities may not fully reflect the increasing likelihood driven by softening labor data and internal policy divergence.
• Evaluate UK asset allocations, particularly those sensitive to interest rates and domestic demand, given the confluence of potential monetary easing and anticipated fiscal tightening from the upcoming budget.
• Consider adjusting exposure to UK sectors reliant on consumer spending and corporate investment, as weak hiring intentions and prospective tax increases could signal a more challenging operating environment.