The Bank of England has waited a long time for the jobs market to cool down, and now it has.
On Thursday, the central bank’s interest rate setters will meet at their Threadneedle Street headquarters, and the expectation is that a rise in unemployment, a fall in vacancies and a weakening of wages growth will persuade them to leave interest rates unchanged at 5.25%.
According to analysts, the latest official figures point to a slowdown in economic output that would only be worsened if the Bank of England were to inflict further pain on businesses.
The uncertainty created by the conflict in the Middle East adds to the expectation that the central bank will be wary of increasing borrowing costs for households and businesses.
George Buckley, chief UK economist at Nomura, says a fall in consumer confidence this month, a slowdown in retail sales, a slump in construction output – especially housing – and a decline in manufacturing should all weigh heavily on the minds of the monetary policy committee (MPC).
However, he adds that inflation, which remains high at 6.7%, and a better than expected performance in the services sector could be set against this negative outlook and add to the pressure for another rise – and the big fall in energy costs that many economists had forecast has been prevented by a rise of about 70% in gas prices over the past three months.
Nevertheless, Buckley says, the MPC is almost certain to hold.
Last month, Bank of England governor Andrew Bailey voted with a slim majority of MPC members to end a cycle of 14 consecutive rate rises since December 2021.
Bailey has said that he believes inflation will undergo a “quite marked” fall later this year, giving a strong hint that the pressure is off for now.
The Bank’s chief economist, Huw Pill, kept everyone guessing when he pushed in the opposite direction earlier this month, saying: “We still have some work to do, in order to get back to [the government’s target of] 2%.”
Concern about strongly rising salaries, which many warned would lead to a wage-price spiral, underpinned the Bank’s successive rounds of tightening from December 2021.
However, Andrew Goodwin, chief economist at consultancy Oxford Economics, says the MPC is likely to take with a pinch of salt figures out last week from the Office for National Statistics (ONS) showing a steep increase in wages. The ONS has come under fire for its new experimental methods, which use a much-diminished survey sample. What’s more, the results are out of kilter with most other measures of pay.
Some MPC members have warned that rate rises earlier in the year have yet to take effect, particularly the hit to homeowners from renegotiating their mortgages. Swati Dhingra has argued that a doubling or trebling of monthly mortgage repayments will be crippling for many households when they refinance in the coming months.
Dhingra has consistently voted to hold rates, fearing that the cumulative effect of higher borrowing costs will eventually cause a sharp decline in disposable incomes.
In a warning that high interest rates have the capacity to cause even more widespread harm after a decade of high borrowing, Chris Williamson, chief business economist at S&P, says there is a whiff of 2008 about the way central banks are cracking down on inflation.
In 2006, 2007 and early 2008, he says, banks kept increasing the cost of borrowing to counter economic booms, only to find they had triggered a timebomb inside the banking sector.
Williamson is not forecasting another Lehman Brothers moment, but he does think the damage caused by high interest rates is being underestimated. “We have had a false signal of economic health from the bounce in services output earlier in the year,” he says. “A return of tourism was one of several other factors to put consumers in a buoyant mood in the summer.”
But he says the underlying situation was deteriorating and now the jobs market is signalling a downturn: “The resilience everyone was talking about was overplayed.”
