UK wage growth and employment improve, lifting BoE hike chances

UK wage growth and employment levels are picking up more than expected, though there may be enough holes in the numbers for the Bank of England to "look through" the data and avoid raising interest rates yet.

UK average weekly earnings in the three months to January rose 2.8% compared to the same period last year, which was higher than the 2.6% that economists had forecast and was up the figure from a month earlier, which was revised up to 2.7% from 2.6%.

The Office for National Statistics revealed that wages excluding bonuses, the measure that the BoE rate setting committee has been focusing on ahead of this week's policy meeting, revealed wages grew 2.6%, as expected, up from 2.5% previously. On a month-to-month basis, basic wages in January were up just 0.13%, or 1.6% year-on-year, which was the smallest increase since February last year.

Real incomes still remain negative, as pay growth was still lagging the 3% rate of CPI inflation in the three months to January.

The headline ILO unemployment rate for the three month period fell back to 4.3% from 4.4%, though the market expected it to have stayed unchanged. There were 1.45m unemployed people, 24,000 more than for the preceding three-month period in 2017 but 127,000 fewer than for the period to January last year.

Employment increased by 168,000, double the consensus estimate and the figure from the previous period.

For more timely data, February's claimant count rate rose to 2.4% from 2.3% in January, while jobless claims in February were up 9,200 after the previous month was revised to a decline of 1,600.

"Employment and unemployment levels were both up on the quarter, with the employment rate returning to its joint highest ever," said senior ONS statistician Matt Hughes, also noting that the number of ‘economically inactive’ people, those who are neither working nor looking for a job, fell by their largest amount in almost five and a half years.

“Total earnings growth continues to nudge upwards in cash terms. However, earnings are still failing to outpace inflation.”

The ONS data, said Howard Archer, economic adviser to the EY Item Club, could encourage the MPC to raise interest rates in May.

In particular, given that rising employment and stronger wage growth were accompanied by a recovery in hours worked, up 0.6% over the three months to January, "suggesting that some of the H2 rebound in productivity was illusory".

Archer said the combination of stronger wage growth and further doubts over productivity "are likely to reinforce the hawkish instincts of the MPC and we expect the Committee to use tomorrow’s meeting to lay the ground for a May rate hike.”

Economist Ruth Gregory at Capital Economics said the labour market figures provided "clearer signs of a revival in earnings growth, suggesting that it won’t be long before we start to see sustained rises in real pay", with the rise in employment "providing further reassurance that the weakening at the end of 2017 was a temporary soft patch".

"Overall, today’s figures add further weight to our view that the next interest rate hike will occur in May."

Providing an alternative view, Samuel Tombs at Pantheon Macroeconomics pointed out that the headline rate of wage growth exceeded the consensus in January only because bonus payments between November and January rose by 6.2% year-over-year and that basic wages increased by the smallest degree in almost a year.

He said slack in the labour market was continuing to decline "only at a modest rate", with the proportion of part-time workers that would like a full-time role increasing to 11.9% from 11.8% in the three months to October.

Although Tombs acknowledged that wage growth should be supported this year by higher negotiated settlements in the private sector and for NHS staff he concluded that the decline in consumers’ confidence over the last year suggests that fewer individuals will take a risk on a new job, easing the pressure on firms to pay more to retain staff.

"Accordingly, we continue to think that wage growth will rise at only a modest pace this year, ensuring that the MPC needs to raise interest rates only by 25bp in 2018."

The pound, which had been edging higher towards the release, jumped on the news, to stand 0.5% higher against the dollar at $1.4070.

"Traders will now look to the BoE for some much-needed clarity," said market analyst Fiona Cincotta at City Index. "Headwinds are starting to dissipate – a Brexit transition deal is in place, inflation from the devalued pound is working its way out the system and wages, which can be a stubborn beast, are proving to be resilient."