UK jobs data keeps questioning the need for rate hikes
The recent UK jobs data poses significant questions regarding the necessity for interest rate hikes by the Bank of England. Although the unemployment rate decreased to 4.9% and May payroll numbers saw a slight uptick, the underlying data points to fundamental weaknesses, particularly in the private sector. Per the full note from ING, the contraction in consumer-facing industries remains pronounced, highlighting a troubling trajectory that keeps monetary policy uncertainties at the forefront.
What the desk is arguing
The latest UK employment figures cast doubt on the urgency of further rate hikes by the Bank of England. Despite a headline decline in unemployment, detailed scrutiny reveals ongoing weaknesses in sectors that drive consumer spending, suggesting that the BoE may maintain its current rates through 2023. Per the full note from ING, the persistent drop in private sector payrolls and slowing wage growth warrant caution and indicate that the economic recovery may not be as robust as initially perceived.
Specifically, the report highlighted a revised drop in payrolls, with an April loss of 53,000 following an initial report of 100,000. This downward revision signals that while May's figures may seem superficially promising, they are underpinned by significant declines in sectors critical for economic momentum, particularly where consumer interaction is prevalent. Wages, while showing some resilience due to public pay increases, do not reflect the same growth in the private sector, suggesting potential stagnation ahead.
Where it sits in our coverage
Our consensus target for GBP/USD stands at 1.075, with a range of 1.04 to 1.12. Notably, firms such as: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) indicate differing views on the currency direction under these macroeconomic conditions.
This cautious view is more pessimistic than the broader market consensus which may position a more aggressive tightening bias. The desk’s position suggests alignment with jpmorgan and leans towards the lower bound of the range, emphasizing a cautious approach moving forward.
How other firms see it
Firms aligned with a cautious view of the UK economy include jpmorgan, which expects GBP to weaken due to underlying economic vulnerabilities. In contrast, bofa holds a more optimistic outlook with a stronger pound forecast, reflecting a divergence in market interpretations of the ongoing economic signals.
Key indicators to monitor include consumer spending trends and potential shifts in the BoE's monetary policy stance. Specifically, the GBP/USD exchange rate's fluctuations will be closely tied to any forthcoming commentary from the Bank of England regarding interest rates.
What the calendar says
With no major economic events on the immediate calendar, the focus will remain on the evolving sentiment around UK monetary policy, especially ahead of future BoE meetings scheduled for later in the year. The absence of data releases may leave the market reactive to global trends until more definitive local indicators arise.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UK jobs data presents a mixed outlook, raising questions about the need for rate hikes.
- 02Persistent weakness in consumer-driven sectors suggests an economic recovery may falter.
- 03Wage growth remains uninspiring outside public sector influence.
- 04The Bank of England is likely to maintain current rates, with a potential pivot to cuts anticipated by 2027.
Market implications
Traders should focus on the GBP/USD levels around 1.075, which reflects the current consensus stance influenced by the latest employment data. Market positioning may adjust with shifts in economic sentiment or any comments from the BoE that could hint at future policy directions.
Risks to this view
A significant catalyst that could reverse this outlook would be an unexpected uptick in consumer spending or a substantial improvement in job statistics that prompts a shift in market confidence towards the UK economy. Additionally, any aggressive tightening signal from the Bank of England could challenge the desk’s thesis.
Older quick take Quick take 07:50 United Kingdom UK jobs data keeps questioning the need for rate hikes Private sector hiring looks weak, despite a superficially brighter May, and wage growth outside of government is slowing rapidly. We expect the Bank of England to keep rates on hold this year and return to rate cuts in 2027 April’s job losses, though revised from a steep 100k drop to 53k, still signal weakness Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download James Smith Developed Markets Economist, UK On the face of it, the latest UK jobs report doesn’t look so bad. The unemployment rate ticked down to 4.9%.
Payrolled employment rose after three consecutive monthly declines (it increased by a marginal 2,000 workers). Average weekly earnings growth was higher than expected. But the details still look dovish for the Bank of England.
And the report is another reminder that the case for higher rates is far from clear-cut. Take those payroll numbers. April’s atrocious 100,000 fall in employment has been cut in half, after revisions.
That’s not a surprise; the latest reading is always prone to change – and usually in an upwards direction. But the newly revised April figure, showing a 53k drop in workers, is still pretty bad. The better May figure should be read in that context – and if you strip out government, private sector payrolls still fell.
What’s more, April’s upgrade doesn’t appear to have lifted the consumer-facing industries which have been at the eye of the storm for the past year. If anything, the rate of decline in job numbers in hospitality, retail and other consumer sectors is getting worse. We calculate that employment is falling by 3.5% in annualised terms across consumer-facing industries.
Hiring is still very weak in consumer industries Source: Macrobond, ING "> Source: Macrobond, ING On wages, the surprise resilience was solely down to a big bump in public pay. While the Bank of England can’t totally ignore that, it remains much more focused on the private sector. And here pay growth is still easing off.
The annual rate is now below 3%, a sizeable drop from 5.2% a year ago. The three-month annualised rate is even lower and suggests that the annual rate has further to fall in the near-term. The broader context here matters.
A year ago, we saw a big increase in employer taxes (National Insurance) and the National Living Wage. And that came alongside a period of rising food inflation. Just as we’re seeing now, that sparked a debate at the BoE about whether all of that would combine to push inflation up and spark another long-winded wave of price pressure.
That hasn’t happened. Yes, headline inflation did go close to 4% last year, but the latest CPI numbers don’t point to much in the way of second-round effects. And these jobs numbers continue to suggest that firms have dealt with those cost pressures through weaker hiring.
Private sector wage growth has further to fall Source: Macrobond, ING "> Source: Macrobond, ING Fortunately, the big fall in energy prices, if sustained, should help contain the fallout of the Middle East crisis across the UK jobs market, though that experience from 2025 still offers a potential playbook for today. We suspect we’ll continue to see pressure on hiring over the coming months. A substantial slowdown in net migration suggests further upside pressure on unemployment is limited, but tepid hiring demand suggests we’re unlikely to see a big fall, either – notwithstanding volatility in the numbers.
In short, today’s figures keep the Bank of England on track for a hold today, and so long as the Iran deal holds, we think rate hikes can be avoided. UK jobs Bank of England Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
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