Bank of England Rate Vote on Knife Edge Because of a Jobs Market Dilemma
By its own admission, the Bank of England went into this week’s rate-setting meeting blind.
While inflation is accelerating above the BOE’s 2% target, crucial figures showing how the end of the furlough program affected the jobs market won’t be available until Nov. 16. That’s 12 days after the central bank’s announcement on Thursday at noon in London.
BOE officials won’t have seen an Office of National Statistics survey, due out early Thursday, that will show what happened to the estimated 1 million workers on furlough when the program shut down. Government figures for the final month of the scheme, also published on Thursday, come too late as well.
Yet the Monetary Policy Committee said in September that a key question for its decision is “how the economy would adjust to the closure of the furlough scheme; the impact of any change in unemployment; the persistence of any difficulties in matching jobs with workers.”
A lack of clarity on the jobs market is one of the reasons why economists are split on whether the central bank will raise rates this week. Ongoing labor supply shortages would put upward pressure on wages, which the BOE will struggle to dismiss as “transitory.”
Markets are betting on a 15-basis-point hike to counter inflation that may hit 5%, guided by the absence of any real push back from Governor Andrew Bailey.
What Bloomberg Economics Says...
“While a low risk, there would be a significant cost to the MPC’s credibility if rates went up and the labor market tanked just weeks after the decision.”
--Dan Hanson and Jamie Rush. Read the full PREVIEW.
Available labor data before the decision suggested that the end of furlough has done little to ease the supply shortages which are driving up wages.
“We were encouraged in the run up to the ending of furlough that people were returning to employment,” Chancellor of the Exchequer Rishi Sunak told the upper chamber of Parliament on Tuesday.
“We haven’t seen a tick up in redundancy notices,” he said. “The ratio of job vacancies to unemployed gives you a sense of where the labor market tightness is.”
That ratio, in official figures to August, was at its lowest level in at least 50 years, and job vacancies hit a record high in the first week of October. Tony Wilson, director of the Institute for Employment Studies, said that indicated “the tightest labor market in modern times.”
Against the surge in vacancies to a record 1.3 million, the Office for Budget Responsibility estimated that unemployment will rise by only 180,000 after the end of furlough. Charlie Bean, a member of the OBR and former BOE deputy governor, said the economy needs them to soak up the jobs or wage inflation could set in.
The BOE’s last forecast had unemployment peaking in winter at 4.75%, below the OBR’s outlook for 5.25%. That suggests that unless the BOE turns pessimistic about near term employment, the case for imminent rate rises remains.
In the longer term, Bean said the U.K. needed half the estimated 170,000 migrants who left in the pandemic to return and many of the 350,000 people who dropped out of the workforce during the pandemic to rejoin.
Wilson said they may be slow to return, as many older workers have taken early retirement and more young people have gone into education, shrinking the available labor force.
The OBR said employers are also contending with a “geographic mismatch” as vacancies have risen fastest in the North while increases in unemployment and furlough have been most pronounced in the South.
“In a world where you haven’t got many workers looking for jobs and vacancies at a very high levels, that is the sort of thing where the central bank starts thinking this going to stoke wage pressures,” Bean said.
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