Rise in unemployment rate won’t faze the BoE

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The latest UK labour market report suggests the Bank of England remains on track to start raising interest rates early next year.

The labour market remained tight in the second quarter. Even though the unemployment rate rose for the first time in more than three years, it remained very low at 5.6%.

We think there’s some scope for the jobless rate to resume falling in the coming quarters. The UK economy is likely to grow at a solid pace into 2016, which should encourage employers to boost hiring. Also, there’s a chance that the end of political uncertainty after the Conservatives unexpectedly won May’s general election will unleash pent-up demand for staff. Political uncertainty typically prompts employers to postpone hiring until the situation becomes clearer.

At the same time, annual wage growth strengthened further, indicating the labour market continued to run out of slack. Average weekly earnings excluding bonuses rose 2.8%, the highest in six years. All sectors reported stronger wage growth. In manufacturing, average weekly earnings excluding bonuses were up 1.3%, the biggest gain since the third quarter of 2014.

Manufacturingwagegrowth_2015Q2

The central bank recently signalled it is likely to start raising the main refinancing rate in early 2016. The labour market data for the second quarter does not provide a strong case for the BoE to bring forward or delay the timing of the first rate increase.

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