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U.K. Labor Market Stays Strong as BOE Weighs Rate Cut

U.K. Labor Market Stays Strong as BOE Weighs Interest-Rate Cut

(Bloomberg) --

The U.K. labor market held up in the face of political turmoil in the three months through November, breaking a run of disappointing data that had boosted bets on a Bank of England interest rate cut this month.

While the pound climbed after the release, the figures, which cover the period before Boris Johnson’s decisive election win, weren’t enough to shake the markets’ view that a reduction in rates this month is more likely than not.

The report showed the employment rate hit a record high after the number of people in work surged by 208,000, the most in almost a year and double the market forecast. The jobless rate held at a four-decade low of 3.8%, although basic wage growth slowed modestly to 3.4% from 3.5%, the Office for National Statistics said.

U.K. Labor Market Stays Strong as BOE Weighs Rate Cut

The report confirms the labor market, the most resilient part of the British economy, continued to create jobs at an impressive pace against a backdrop of slowing economic growth as a missed Brexit deadline and then a looming general election hit demand.

“The labor market is holding up better than feared, which supports expectations for a post-election pick-up in growth,” said Lee Hardman, a strategist at MUFG Bank Ltd. “However, it is unlikely to be decisive on its own in determination whether the BOE cuts rates.”

A spate of feeble economic readings before today’s release, from GDP to retail sales, and dovish comments from officials including BOE Governor Mark Carney have left markets betting heavily on a Jan. 30 rate reduction.

One argument against drawing too much from the release is that employment is lagging indicator, and policy makers Michael Saunders and Silvana Tenreyro have expressed concern that the jobless rate could rise next year unless the economy quickly improves.

Surveys show hiring received a boost from Johnson’s election win last month but it’s not clear whether the momentum can be sustained, with the U.K. about to embark on potentially difficult post-Brexit trade talks with the European Union. Crucial will be PMI data due Jan. 24, which will provide an insight into how the economy fared at the start of the year, as well as the BOE’s own intelligence from its network of agents.

That may explain the fairly muted market reaction. The pound edged higher after the report, climbing 0.3% to $1.3049 as of 10:26 a.m. London time, while gilts pared an advance. Money-market pricing for a January BOE rate cut remained around 65%.

Key Insights

  • Employment rate hits record 76.3%. Self-employment exceeds 5 million for the first time, though full-time employees accounted for most of the increase in the latest three months
  • Unemployment fell just 7,000 as participation in the labor market rose strongly. The number classed as inactive dropped 171,000
  • Vacancies stood at 805,000 in the fourth quarter, down 11,000 from the third quarter but up from 798,000 in Sept.-Nov.
  • Average earnings growth including bonuses remained at 3.2%, well ahead of inflation. The pace of growth has slowed from 3.9% over the summer but the figures suggest the labor market remains tight
  • In real terms, regular pay is just 0.2% below its level before the financial crisis
  • Women accounted for two thirds of the rise in employment

--With assistance from William Shaw.

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net;David Goodman in London at dgoodman28@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Andrew Atkinson

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