UK unemployment rate rises to highest since last summer

London: UK unemployment rose and private-sector wage growth eased, signs of a broad-based cooling in the labor market that are likely to give the Bank of England more confidence to cut interest rates in the coming months.

The jobless rate climbed 0.1 percentage point to 4.3% in the three months to March, the highest since last summer, the Office for National Statistics said on Tuesday. While overall wage growth excluding bonuses was unchanged, it slowed to 5.9% in the private sector — less than the 6% the BOE had forecast.

The figures suggest the labor market is heading in the right direction for the BOE, which last week signaled it could cut interest rates from a 16-year high as early as June — so long as inflationary pressures continued to subside.

That view was cemented by BOE Chief Economist Huw Pill in comments made after the labor market release. Speaking at a conference, Pill — who has been one of the more cautious voices on the Monetary Policy Committee when it comes to easing policy — said it is “not unreasonable” to expect cuts to come under consideration over the summer as sticky inflation recedes.

Traders responded by adding to bets on BOE easing, pricing a 50% chance of a cut in June, while fully pricing a quarter-point cut by August. The pound dropped to the lowest this week, falling as much as much as 0.4% to $1.2510.

The number of people in work fell by 178,000 in the first quarter. Meanwhile, payrolled employment based on real-time information dropped by 85,000 in April, the largest decline since May 2020 when Britain was in lockdown.

“The release this morning tentatively supports a cut in June, but there is still more data to come that the MPC will need to digest before they need to make that decision,” said Tomasz Wieladek, chief European economist at T. Rowe Price.

The figures are the first in a series of releases that will be crucial for BOE rate-setters ahead of their next policy meeting in June. Governor Andrew Bailey has said there would be a case for bringing rates down from 5.25% if data is in line with its forecasts.

While data next week are expected to show inflation falling close to the 2% target in April, officials need to judge whether it can be held at that level. That makes the strength of cost pressures being experienced by firms a crucial indicator.

“Signs of sticky wage gains in the latest batch of jobs data are unlikely to raise the alarm at the Bank of England. Private pay growth is running below its latest forecast and recent communication suggests it’s the path of services inflation that’s the key metric for the Monetary Policy Committee. We continue to think the BOE will feel comfortable cutting rates in June, provided domestic price pressures ease further and headline CPI falls to close to 2% in the upcoming data.

Prime Minister Rishi Sunak will be hoping for pre-election interest rate cuts that lift the mood of the consumer ahead of an election expected later this year. His ruling Conservatives are well behind the opposition Labour Party in opinion polls after household finances were battered by higher borrowing costs and double-digit inflation.

Private-sector wage growth — the measure the BOE is monitoring more closely — fell from 6% in the three months through February. Public-sector wage growth picked up to 6.3% from 6.1%

The number of unemployed per vacancy continued to rise, hitting 1.6 – the equal highest since the three months to Aug 2021

The employment rate dropped to 74.5%, a steep decline from 75% in the previous quarter, to its lowest since the three months to May 2021. The fall was driven by an increase in both unemployment and inactivity

Inactivity climbed to 9.38 million, up 104,000 on the previous quarter. Within that, long-term sickness increased by 20,000 to 2.83 million

An estimated 22,000 working days were lost to strikes in March, the ONS said. That was the lowest in April 2022

In a statement, Chancellor Jeremy Hunt noted that wages have risen faster than inflation for 10 months in a row, which he said would help with the cost of living pressures on families.

The BOE expected unemployment of 4.3% in the first quarter, with further gains over the next two years. The central bank, which anticipated 6% wage growth, predicts a material slowdown from the second quarter onwards.

The figures are likely to be complicated by a near 10% increase in the minimum wage in April, which could also push up wages further up the income scale.

Policymakers are trying to gauge the strength of the jobs market at a time when the accuracy of the official statistics is under question. The ONS has urged caution in reading its data after temporarily suspending the Labour Force Survey last year due to a plunge in response rates.

“A weakening labour market is a harbinger of interest rate cuts,” said Yael Selfin, chief economist at KPMG UK. “Next month will be key in terms of pay data as it will provide initial evidence of the impact of April’s National Living Wage increase.”