What does the fall in wages growth mean for interest rates?

The release of Britain’s latest jobs and unemployment figures passed off without triggering a widespread reaction in financial markets, something of a relief after the equivalent data in the United States sparked the worst rout in global stocks in two years earlier this month.

The Office for National Statistics said that the jobless rate in the UK had fallen unexpectedly from 4.4 per cent to 4.2 per cent in the second quarter, rather than rising to 4.5 per cent, as analysts had predicted.

Nevertheless, the unemployment figure, which comes with a health warning because of low response rates to the ONS’s survey, will raise concerns that recent cooling in the labour market has stalled.

Other figures, including a strong rise in employment in the three months to the end of June and a small increase in the ratio of vacancies to unemployed people, also paint a picture of a labour market that is not softening at the pace that ratesetters at the Bank of England would like to see as they begin to loosen monetary policy. The central bank’s monetary policy committee cut interest rates for the first time since 2020 this month to 5 per cent and are wary of any signs of a resurgence in inflation.

On other measures of labour market tightness, the Bank can take some comfort. Most notable is the decline in wages growth to a two-year low of 5.4 per cent, in line with forecasts, in the three months to June. There was a steeper drop in earnings including bonuses to a three-year low of 4.5 per cent, partly distorted by one-off NHS pay awards last June.

“Different camps within the MPC will likely see this as vindication of their recent votes,” Peter Arnold, chief economist at EY Item Club, a forecasting group, said. “The doves will interpret slower wages growth as evidence that the inflation shock is dissipating, suggesting that policy can be gradually loosened. But the hawks will likely maintain that the rate of pay growth is still too high to keep inflation at 2 per cent over the medium term.”

The pound rose by 0.2 per cent against the dollar to $1.28 after the data was released, suggesting that traders think an interest rate cut in November is a little less likely. Markets have already ruled out September’s meeting for another rate cut, even as the US Federal Reserve could be poised to reduce its benchmark rates by a bumper half a percentage point next month.

Yet with inaccuracy plaguing the labour force numbers, investors and the MPC are likely to put more weight on new inflation and growth figures released this week to determine their outlook on the path of interest rates.