Wage Growth Hits Six-Year Low: Why the BoE Still Has to Hike
UK jobs data just posted its weakest numbers in years. But an oil-driven inflation shock means the Bank of England may have no room to stay patient.
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The contradiction is staring everyone in the face. Britain's jobs market just posted its weakest data in years, wages are barely growing, and yet traders are pricing in rate hikes as near-certainties by the end of the year. The catch: oil prices just won't quit, and that changes the calculation entirely.
The numbers tell a clear story on the labour side. Job vacancies fell to 702,000, the lowest since spring 2021 outside the pandemic years. Payroll employment dropped 26,000 in August, more than double what economists forecast. Average weekly earnings excluding bonuses rose just 3.5% annually, close to its slowest pace since 2020. On paper, this is exactly the kind of data that would normally buy you time on rate hikes.
But here's where it breaks down. Energy prices are ripping higher on Middle East conflict concerns, and that's creating a gap between what the labour market says and what headline inflation is about to scream at the BoE. The next CPI release lands Wednesday, a day before the Bank's rate decision, and the market expects it to show inflation pushed higher, driven entirely by energy. Core inflation holding steady only matters so much when the headline number jumps and global oil keeps climbing.
This puts the BoE in an awkward spot. Thursday's decision is almost certainly a hold at 3.75%, because there's no case for moving now when employment is weak and wage growth is crashing. But the forward guidance conversation will be brutal. Traders are pricing in hikes before year-end as near-locks, and the oil backdrop makes it hard for the BoE to talk them down.
For portfolio positioning, the weak jobs data initially looked like a gift, short-term rate relief. But it's being overwhelmed by the energy shock. Gilt yields will likely stay elevated, especially at the longer end where inflation expectations are repricing. Sterling could find support on the back of higher real rates coming down the line, but near term it stays under pressure as traders wrestle with the contradictions.
The real signal to watch is how many officials hint at a near-term hike being live. If they lean into that, expect gilts to reprice steeper and equity multiples to face more downward pressure. If they try to sound patient, the market won't buy it, and you'll see yields march higher anyway.