Resilient Jobs Curb BOE Rate Cut Pace
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The latest reports on wage growth in the UK suggest a significant upward shift by the end of 2024, indicating a resilient employment marketThis improvement offers insight into the cautious stance of the Bank of England regarding potential interest rate cuts, particularly in the context of a generally weakened economyAs of December, average wages - including bonuses - witnessed a year-on-year rise of 6%, the highest since late 2023. This increase surpassed both previous figures and economist predictions, showcasing a more optimistic employment landscape than previously thought.
Data released recently showed that for the three months leading up to January, job vacancies in the UK fell by 9,000 compared to the previous three-month period ending in OctoberHowever, this figure remains 23,000 higher than pre-pandemic levelsIn a contrasting vein, the HMRC's employment data indicated a net addition of 21,000 jobs over the past eight months, marking a notable trend in growthThe unemployment rate, as defined by ILO standards, remained steady at 4.4% in December, suggesting stability in the job market.
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However, the newly released data shattered these expectations, revealing that job losses were significantly lower than anticipated, and unemployment rates remained relatively stableNotably, certain sectors even witnessed a rise in employment figuresFor instance, the booming tech industry has ignited a higher demand for skilled professionals, prompting numerous emerging tech firms to ramp up recruitment efforts and absorb substantial volumes of labor.
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Investors must remain vigilant to shifts in various economic indicators to adapt their investment strategies to a dynamic landscapeConcurrently, the Bank of England faces considerable challenges, needing to finely tune the intensity and rhythm of their monetary policy in an intricate economic scenario, ensuring the sustainable and healthy development of the UK economy.
It is important to note that the pace of wage growth remains significantly above the Bank of England's inflation target of 2%. Huw Pill, the chief economist at the Bank, recently highlighted that the primary issue facing the UK economy is rooted in supply constraints, including labor shortages.
However, James Smith, an economist at ING, believes that circumstances might soon changeHe articulated that despite lower levels of layoffs, the risk persists that trends may shift, particularly in light of government tax increases anticipated in the springOver time, a cooling job market could contribute to a gradual deceleration in wage growth.
In a recent budget announcement made by Chancellor of the Exchequer, Rachel Reeves, significant changes to major payroll taxes, such as the increase in employer National Insurance contributions and the rise in minimum wage, are set to place burdens on businessesConsequently, this could lead to reductions in hiring and a slowdown in wage growthA recent survey revealed that around one-third of UK employers are contemplating layoffs in response to the government’s tax increase plans.
The Monetary Policy Committee of the Bank of England voted in early February to reduce interest rates by 25 basis points to 4.5%, with a majority of 7 to 2. It is noteworthy that the Bank’s economic forecast has worsened since the last comprehensive update in November, with a 50% reduction in the growth prediction for this year to 0.75%. This revision is attributed to weaker business and consumer confidence, as well as slower productivity growth
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