Cool UK jobs market questions need for rate hikes
The UK's job market continues to show signs of weakness, raising questions about the necessity for interest rate hikes from the Bank of England (BoE) in the near future. Per the full note from ING, sustained low levels of private-sector hiring and wage stagnation suggest that any rate hikes might be pushed back to 2026, contingent on unexpected spikes in energy prices. With the latest figures showing a 1.1% growth in payrolls on a three-month annualized basis, the outlook remains cautious amidst ongoing reductions in consumer-facing jobs. Consequently, the desk believes the BoE is unlikely to change rates this year and might begin cutting them by spring 2027, reflecting a hesitant outlook on growth amidst job market stagnation.
What the desk is arguing
The current job market dynamics in the UK present a clear case against immediate rate hikes by the Bank of England. As indicated in ING's analysis, ongoing job losses in sectors such as hospitality and retail are contradicting any semblance of economic recovery, highlighting a broader stagnation in private sector employment.
Moreover, wage growth disparities — with public sector pay rising at 6.1% compared to just 2.8% in the private sector — paint a concerning picture. This environment suggests that without significant escalation in energy costs or a fundamental change in labor market conditions, the bar for a rate increase remains high.
Where it sits in our coverage
The consensus target for GBP/USD across leading banks is currently at 1.075, with projections from firms including: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns closely with our desk’s projection, sitting right in the middle of the range, indicating a balanced outlook towards the end of 2026 amid uncertainty in the UK's economic recovery phase.
How other firms see it
Aligned firms like jpmorgan and others in the consensus are adopting a similar cautious stance on the GBP/USD trajectory given current labor market signals. In contrast, bofa presents a more bearish outlook, anticipating weaker performance by early next year.
Monitor GBP/USD closely, as its trajectory will be directly influenced by the BoE's rate decisions, which now appear unlikely to shift in the short term given the current economic conditions. Both the labor market and inflation indices should be relevant indicators moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Weak private-sector job growth signals limited need for rate hikes from the BoE.
- 02Wage disparities highlight economic challenges, especially in the private sector.
- 03Expect no rate changes from the BoE this year, with potential cuts beginning in 2027.
Market implications
Traders should keep an eye on GBP/USD, particularly how it interacts with the BoE's upcoming decisions. With a current level around 1.075, any shifts in the labor data may prompt reassessments of future rate hikes.
Risks to this view
A substantial rebound in the job market or unexpected inflationary pressures could potentially invalidate our view. Should wage growth accelerate significantly, the need for immediate policy adjustments may force the BoE's hand earlier than anticipated.
Older quick take Quick take Published 07:56 United Kingdom Cool UK jobs market questions need for rate hikes Ongoing weakness in private-sector hiring and wage growth suggests the bar is still relatively high for a rate hike in 2026, barring a severe and prolonged spike in energy prices. We expect the Bank of England to remain on hold this year and resume rate cuts from spring 2027 Vacancy numbers are still gradually falling and are well down on pre-Covid levels, with both hospitality and retail consistently shedding jobs Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download James Smith Developed Markets Economist, UK If the UK economy really is picking up speed – as last week’s GDP data tentatively hints – then there’s little sign of it in the jobs market. Admittedly, just like the growth figures, it really depends on where you look.
Government is still actively hiring, a trend we've seen throughout this year. Payroll growth is running at 1.1% on a three-month annualised basis, though we have our doubts over how long this can continue given the more austere plans for public spending coming down the track. In sharp contrast, consumer-facing industries (hospitality and retail) have been consistently shedding jobs, and if anything, the pace of decline is getting worse.
That follows ongoing pressure since last year’s tax and minimum wage hikes. The remainder of the private sector is flatlining – and apart from last week’s more optimistic KPMG/REC hiring survey, most other surveys don’t point to any sign of an imminent upturn. Consumer-facing industries are seeing the sharpest falls in payroll employment Source: Macrobond, ING "> Source: Macrobond, ING That disconnect is clearly visible in wage growth.
Pay is rising by 6.1% across government, compared to just 2.8% in the private sector. Admittedly, that latter figure is being slightly depressed by “compositional” effects, something the BoE is keen to point out. This is a slightly weird quirk that’s emerged in the survey underpinning those wage figures, which show a rise in low-paid employment relative to higher-paid jobs (the opposite of what the more reliable payroll data described above), and which is skewing the average level of pay growth lower.
Strip that out, and private-sector pay would be 0.4ppt higher. Still, the basic story here is that the jobs market is cool. We can see that in the vacancy numbers, which are still gradually falling and are well down on pre-Covid levels.
We can see that in the unemployment rate, notwithstanding the latest reliability issues. And crucially for the Bank of England, there is little sign that wage growth is about to turn higher. Barring a severe and persistent spike in energy prices, we think the Bank will keep rates on hold until next spring, before cutting rates at least twice in 2027.
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