UK labour market loses more steam, bolstering BoE rate cut bets

Britain's labor market cooled notably in the third quarter, with the unemployment rate rising to 5.0% and wage growth, excluding bonuses, slowing to 4.6%. This data significantly bolsters expectations for a Bank of England interest rate cut next month, leading to a drop in the pound against the dollar and an increase in anticipated rate cuts priced into interest rate futures.

Analysis

Britain's labor market experienced a notable cooling in the third quarter, with the unemployment rate rising to 5.0% from 4.8%, marking its highest level since February 2021. Concurrently, annual wage growth, excluding bonuses, slowed to 4.6% in the three months to September, aligning with Reuters poll expectations and slightly below the 4.7% recorded in the prior period. Furthermore, a separate measure indicated a 32,000 drop in payrolls for October, following a similar decline in September, signaling a broader softening trend.

This data has significantly bolstered expectations for a Bank of England (BoE) interest rate cut as early as next month, with interest rate futures now pricing in 65 basis points of BoE cuts by the end of next year, up from 55 basis points. The pound reacted by dropping approximately a quarter of a cent against the dollar, reflecting market anticipation of looser monetary policy. The BoE's key metric, private sector wage growth excluding bonuses, also cooled to 4.2%, consistent with the central bank's earlier forecasts.

The moderating wage pressures and softening labor market strengthen the BoE's case for resuming interest rate cuts, as articulated by KPMG's chief economist, Yael Selfin, who expects wage growth to align with the inflation target by year-end. While the BoE kept rates on hold last week, a narrow vote and Governor Bailey's potential shift suggest increased readiness for a December cut, contingent on further evidence of abating inflationary pressures. Finance Minister Rachel Reeves will also be monitoring these developments ahead of her November 26 budget, balancing hopes for lower borrowing costs with concerns over a weakening jobs market.

Key Decisions for Investors

• Investors should monitor upcoming Bank of England communications and the November 26 budget for further signals regarding monetary policy easing, as the recent labor market data strongly supports a December rate cut.
• Consider potential implications for GBP-denominated assets, given the pound's immediate reaction to the data and increased expectations for interest rate differentials.
• Evaluate sector-specific impacts of a cooling labor market and potentially lower borrowing costs, particularly for interest-rate sensitive industries and consumer-facing businesses.