Despite falling unemployment, a November rate cut looks almost certain

After today’s labour market figures, the Bank of England looks on track to cut interest rates again in November.

The figures showed that regular pay growth was at its lowest level since June 2022 while pay growth including bonuses dropped to its lowest level since November 2020.

Pay growth in the private sector, which is the main focus for the Bank, fell to 4.8 per cent, its lowest level since February 2022.

Bank officials have repeatedly warned about the potential persistence of inflationary pressures driven by strong wage growth, so these figures will be reassuring.

The fall in pay growth will strengthen the case for a second 25 basis point rate cut in November.

Indeed, Rob Wood, chief UK economist at Pantheon Macroeconomics, said that a cut next month was a “slam dunk”.

There are still some reasons to be cautious, particularly as the impact of inflation-busting public sector pay deals filters through into the figures. Some economists have warned that the pay deals could become a “benchmark” for the private sector.

Still, the data so far suggests that wage growth is falling roughly in line with the Bank of England’s expectations, signalling that the danger of embedded inflation is receding.

That being said, the big question for investors looking at the figures is how seriously to take the unemployment figures.

According to the Office for National Statistics (ONS), unemployment fell to 4.0 per cent in the three months to August, its lowest level since the start of the year.

On the face of it this would strengthen the case for caution on the Monetary Policy Committee. A tighter labour market would, after all, put upward pressure on wage growth.

However, the ONS was very explicit that its figures should be treated with caution given the well-publicised difficulties it is facing collecting data.

Economists were fairly dismissive of the figures too. Andrew Goodwin, chief UK economist at Oxford Economics, said the figures were “almost certainly misleading”.

Pantheon’s Wood pointed out that the decrease in the joblessness rate was driven by a “ludicrous looking boom in jobs”.

“These figures are nonsense,” he said. “There are no other signs that the UK is currently experiencing a massive job boom”.

The Resolution Foundation pointed out that the quarterly growth rate in the number of payrolled employees turned negative for the first time since January 2021 in the three months to September.

Multiple different labour market surveys also point to growing slack in the labour market, a fact which the ONS acknowledged.

“External sources are suggesting that recent increases in LFS measures of employment are likely to be overstating underlying employment growth,” it said.

So it seems clear enough that the unemployment figures should not be taken too seriously. It is therefore very unlikely that it will stand in the way of another rate cut in November.