ING Group reported on Wednesday that despite the possibility of rate reductions, the Bank’s current task appears incomplete. The Bank’s own committee has a divided opinion, and the Bank also seems less confident.
Take the labour market for example. ING reported that in 2022 the job market was very tight. There were a lot of vacancies and fewer unemployed people. Two-thirds (or 67%) of companies had difficulty recruiting.
Economic migration in flux
The tightness of the market was then altered by an influx in economic migrants.
The number of non EU nationals working in Britain will double between late 2019 and late 2024.
The number of UK workers increased by only 24,000 despite the fact that the EU workforce decreased.
The proportion of non EU workers working in low-wage industries like health/social services and hospitality has jumped significantly from 10% to 20 %.
In the report, James Smith, UK developed markets economist at ING Group said that “the result is that job openings have declined sharply – and even more than other developed economies”.
According to Smith, the ratio of unemployed to job seekers has dropped below pre-Covid. There are only four positions available per ten people looking for work.
Unusually, there are more closing companies than new ones.
Data quality problems aside, unemployment is on the rise.
Source: ING Research
Overstated fears of inflation
Two reasons make the current situation significant.
First, the fact that wage growth has fallen from 6.9% in January last year to just 3.9% by October, and could even reach 3% this coming winter, indicates that real disposable incomes are likely to stagnate.
Second, the fears about another surge in inflation are exaggerated. Workers and businesses do not have the same power as in 2022 to raise wages or price to compensate for rising costs.
Despite the spike in food prices, ING doesn’t expect to see an inflation as high-leveled as previously.
Food inflation has already begun to decline, as evidenced by the data coming from Western Europe, and also the UN’s indicator of falling food prices.
BoE is cautious
Another important factor is the recent decline in GDP numbers.
It is estimated that the UK economy will grow by just 0.1% during the third quarter of this year and remain flat for the entire fourth quarter. However, the projected growth might be exaggerated.
The GDP data has consistently showed a better performance during the first half of each year than the second. This suggests a possible issue with seasonal adjustment methodologies.
Smith stated that “listening to that you may be tempted by the Bank to cut rates once again during its next meeting, in February.”
This was our thought after data were released in December. After a surprising hawkish BoE ruling last month, this now seems unlikely.
The Bank of England cut rates in the last month, and hinted at another possible reduction. However, it also sent a clear message to say that future rate cuts may not be imminent.
Bank of England Governor Bailey suggested that the Bank could “slow down the cadence of rate reductions”.
This pace is already slow, especially when you consider that there was no cut between August and Decembre.
The market is almost unanimous in its expectation of an April reduction, whereas the probability that a cut will occur in March is 50/50.
The recent BoE monthly survey of business was a key area of agreement for both “doves and “hawks”, on the Bank of England Monetary Policy Committee.
The survey indicates that wage growth will remain stable between 3.5% and 3.8%.
The release on Thursday of this next set of survey results will therefore be of great significance.
Source: ING Research
The next rate cut is likely to be in March
According to the ING Report, the limited new data that is expected to arrive before the February early meeting will not be enough to convince the Committee to approve another rate reduction next month.
In December, the Bank expects to temporarily see an increase in services inflation.
The timing of the airfare measurement is responsible for this rise.
ING stated that by March there would be three additional releases on wage growth. If it remains benign, this should provide a significant reassurance for the committee.
Smith stated, “For this reason, we believe the Bank will continue to cut rates in March and again in June.”
It only takes a few officials who are willing to take a different stance in order to drastically change the rate-cutting pace.
The post Softening UK job market paves the way for BoE to cut rates in March, according to ING Group could be updated as new information becomes available.
