UK Labor Market Signals Strength, Complicating BoE Rate Cut Outlook; GBP/USD Rebounds

Labor Market Overview, UK – February 2025

The latest UK labor market data challenged expectations of a Bank of England (BoE) rate cut in March.

The UK unemployment rate remained at 4.4% in December, suggesting a stabilizing labor market. A resilient job market may boost wage growth, fueling consumer spending and demand-driven inflation.

Wage growth accelerated in the three months to December, boosting household consumption. Average hourly earnings (including bonuses) rose 6.0% in the three months to December year-on-year, up from 5.5% in November.

The Office for National Statistics provided crucial insights into the UK labor market:

• The number of payrolled UK employees declined by 3,000 month-on-month in December but increased by 106,000 between December 2023 and December 2024.
• Early estimates of payrolled employees for January 2025 signaled a rise in employment, with 21,000 more payrolled employees.
• Job vacancies declined by 9,000 from November 2024 to January 2025, marking the 31st consecutive period of decline.
• The claimant count increased in January and on a year-on-year basis.

Wage Growth and Steady Unemployment Could Complicate the Inflation Outlook

Stable unemployment and rising wages may force the BoE into a policy-holding pattern. A steady job market could support consumer confidence, potentially driving spending. Additionally, the BoE may need to assess whether wage growth is translating into inflation before considering further rate cuts.

In February, the BoE cut interest rates by 25 basis points to 4.5%. Notably, two Monetary Policy Committee members voted for a larger 50 basis point cut, reflecting concerns about the UK economy. However, the UK economy grew faster than expected in December (+0.4% month-on-month), another potential hurdle for dovish BoE policymakers.

BoE Governor Andrew Bullock remarked on recent inflation trends, stating:

“We still see the gradual disinflation going on. The after-effects of what happened two or three years ago are wearing off, but it is a gradual process.”

If the recent spike in inflation is temporary, the BoE may gain confidence that consumer prices will soften. However, persistent wage growth could pose inflationary risks, complicating the BoE’s policy outlook.

GBP/USD Response to the UK Labor Market Data

Ahead of the UK labor market report, the GBP/USD briefly climbed to a high of $1.26229 before falling to a low of $1.25924.

After the release of the UK Labor Market Overview Report, the GBP/USD dipped to a low of $1.25958 before rallying to a high of $1.26180.

On Tuesday, February 18, the GBP/USD was down 0.03% to $1.26196. The market reaction to rising wages and a steady unemployment rate suggested traders expect a less dovish BoE stance.

While bets on a March BoE rate cut may have faded, upcoming UK economic indicators will give traders more clues on the BoE rate.

On Wednesday, the UK CPI Report could influence BoE rate cut bets if inflation accelerates. Economists expect the annual core inflation rate to rise to 3.6% in January, up from 3.2% in December. UK retail sales and Services PMI data also require consideration on February 21.

Expectations of more aggressive BoE rate cuts could drag the GBP/USD pair toward $1.25. Conversely, upbeat data could delay a BoE policy move, potentially driving the pair toward $1.26500. Later in Tuesday’s session, BoE Governor Bailey will speak. His views on labor market trends and monetary policy could also move the dial.

Follow market shifts here with timely updates and expert insights into economic trends and their global implications.