UK unemployment held at 4.9% in the three months to June while private-sector pay growth slowed to its weakest pace since October 2020. The cooling labour market is undercutting the case for a Bank of England rate hike, even as economists expect Wednesday's inflation reading to jump.
The UK's unemployment rate stayed at 4.9% in the three months to June, official data show, but the details beneath that headline number point to a labour market losing momentum. Job vacancies fell, private pay growth eased, and economists say the trend now questions the need for the Bank of England to raise interest rates at all.
Private pay growth slows, public pay accelerates
Regular pay growth excluding bonuses, in the private sector, slowed to 2.8% — the weakest rate since October 2020. Public-sector pay, by contrast, accelerated to 6.1%, reflecting the timing of NHS pay awards this year compared with 2025.
Aberdeen economist Felix Feather said: "Today's labour market figures continue to point to a softening UK jobs market." Job vacancies fell by 6,000 to 707,000 in the three months to July, while the claimant count jobless rate dropped from 4.4% to 4.3%. Youth unemployment eased too, falling to 16.2% in June, though Investec's Philip Shaw noted the level remains high, having climbed by over 2.5 percentage points over the past two years.
Rate hike bets face a cooling jobs market
The Bank of England is considering raising interest rates from as early as September over fears that high inflation becomes entrenched, but the softer jobs data suggest a rate hike may not be needed. ING's James Smith said the cooling labour market means the Bank has little reason to tighten unless energy prices spike severely and persistently because of the Middle East war. He expects the Bank to hold rates until next spring, then cut rates at least twice in 2027.
However, the picture is not one-sided. Total earnings growth including bonuses fell to 4.1% from 4.3%, a smaller drop than the fall to 4% that economists had forecast. Regular pay growth excluding bonuses across the whole economy ticked up to 3.5% from 3.4%, above the 3.4% economists expected.
Inflation reading looms over sterling
Economists forecast Wednesday's official data will show UK inflation rising to 2.9% in July, up from 2.6% in June, driven by higher energy bills. That contrasts with grocery inflation, which eased to 2.1%, its lowest level in almost two years. Aberdeen's Feather said he still expects the Bank to stay on hold for the rest of the year, but flagged that Wednesday's inflation jump could challenge the impression of domestically generated disinflation.
Source: The Guardian
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