The latest Labour Force Survey results, adjusted for new population estimates, have revealed a surprising uptick in employment and a drop in unemployment rates, casting fresh scrutiny on the Bank of England’s Monetary Policy Committee (MPC) and its forthcoming decisions on interest rates, according to Pantheon Macroeconomics.
According to the revised figures, employment in the UK saw a notable increase of 108,000 in the three months leading up to November, surpassing earlier provisional figures based on PAYE data, which suggested a more modest rise of 73,000. The unemployment rate for the same period fell to 3.9%, a decrease from the 4.2% recorded in the previous three months and lower than the 4.2% anticipated based on claimant count changes since July.
Samuel Tombs of Pantheon Macroeconomics said this unexpected shift in unemployment figures, now below the MPC’s forecast of 4.3% for the fourth quarter outlined in its recent Monetary Policy Report, as well as the committee’s equilibrium rate estimate of 4.5%, may influence the committee’s approach to interest rates. The MPC, tasked with setting the Bank Rate to meet the Government’s inflation target, might perceive these improved employment figures as a sign of a tightening labour market, potentially applying upward pressure on wages and inflation, and thus be more cautious about lowering interest rates.
However, the Office for National Statistics (ONS) has expressed reservations about the reliability of these latest figures due to ongoing concerns about the response rate to the Labour Force Survey. Despite efforts to enhance data accuracy, including the reintroduction of face-to-face interviews and an increase in sample size, the full impact of these measures will only be apparent over time. The ONS is thus advising a cautious interpretation of these figures and recommends considering a broader range of labour market indicators.
Amidst this backdrop of statistical uncertainty, there are signs that unemployment may be on an upward trajectory. Recent data, including a 17% year-on-year increase in redundancy notifications to the Insolvency Service and a significant rise in Google searches related to redundancies, suggest that the labour market may be cooling. These indicators hint at potential job losses ahead, reinforcing the case for a more dovish stance from the MPC in the future.
Economists, including Tombs, believe that despite the current data, the MPC is likely to cut the Bank Rate to 4.50% by year-end, down from the current 5.25%, with the initial reduction expected in May. However, the timing of such cuts remains uncertain, as the committee weighs the implications of the latest employment data against emerging signs of a softening job market.
