UK Inflation, Jobs Dip, Opens Door for Interest Rate Cut
On the afternoon of October 16th Beijing time, the UK's Office for National Statistics released the country's latest inflation data. The UK's CPI in September 2024 rose by 1.7% year-on-year, which is lower than the market expectation of 1.9%, significantly lower than the previous value of 2.2%, and has reached a new low for more than three years; the core CPI also fell back, rising by 3.2% year-on-year in September, lower than the previous value of 3.6%.
The data shows that the last time the UK's CPI rose by less than 2% year-on-year was in April 2021, when the CPI rose by 1.5% year-on-year. Since then, the UK's CPI has continued to rise, leading the Bank of England to raise interest rates several times to cope with the increasing inflationary pressure. In 2024, the UK's CPI rose by 2% year-on-year in May and June, which is the target inflation rate set by the Bank of England. However, the CPI rose slightly in July, and the core CPI "took over" and rose in August.
Due to concerns that inflation data may rebound in the second half of the year, the Bank of England started its first interest rate cut of the year in August, but only reduced the interest rate by 0.25 percentage points to 5%. At the September interest rate meeting, the Bank of England announced a pause in interest rate cuts with an 8:1 voting result, while reiterating that "monetary policy needs to remain restrictive for a sufficient period of time." At this time, the global interest rate cut wave is continuing to spread, the European Central Bank has started its second interest rate cut of the year, and the Federal Reserve also started its first interest rate cut of the year at the September interest rate meeting. The more proactive Bank of Canada has cut interest rates three times in a row.
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With the September CPI and core CPI data both falling, especially the slowdown in service industry inflation that the Bank of England has been highly concerned about, the market's expectation for the Bank of England to restart interest rate cuts at the November interest rate meeting is heating up. From the market performance, after the aforementioned inflation data was released, the pound's exchange rate against major currencies both fell straight down. The data shows that as of the time of writing, the pound's exchange rate against the US dollar has broken through the 1.3 mark, falling by 80 basis points during the day; the pound's exchange rate against the euro has broken through the 1.2 mark, falling by 59 basis points during the day.
The market expects the Bank of England to be more dovish, and traders are now betting that the Bank of England will cut interest rates continuously in November and December, while they were only inclined to cut interest rates once before. Suren Thiru from the Institute of Chartered Accountants in England and Wales commented, "These data are reassuring. Driven by the decline in fuel prices, the UK has entered a more moderate inflation environment. The significant decline in service industry inflation indicates that potential price pressures are weakening."
He believes that due to the regulatory authorities raising the energy price cap, the UK's inflation rate may reverse in October. The Bank of England will wait until the end of the month to assess whether the first budget of the UK Labour government may have an impact on inflation before determining the next step.
Jane Foley, head of foreign exchange strategy at Rabobank, believes, "This is a green light. I'm just not sure if there are enough signs that inflation has returned to the box, and the Bank of England can speed up."
At the same time, the UK labor market continues to slow down. For the Bank of England, it also opens up room for further interest rate cuts next month. The slowdown in the UK labor market is reflected in two aspects. First, the speed of salary increases for UK employees has further slowed down. The data shows that from June to August, excluding bonuses, the salary growth rate for UK employees fell to 4.9% year-on-year, and the income growth rate including bonuses fell to 3.8%. Excluding the impact of inflation, the real wage level of UK employees rose by 1.9% year-on-year. Second, the number of job vacancies in the UK market continues to decline. From July to September, the number of job vacancies in the UK labor market fell to 841,000, a decrease of 34,000 from the previous three months. This is the 27th consecutive decline in the number of job vacancies in the UK labor market.
At the enterprise level, the most direct manifestation of the slowdown in the labor market is the obvious decrease in enterprises' willingness to recruit. The British Chambers of Commerce (BCC) announced a survey report on more than 5,100 companies of different sizes on the 13th, showing that in the past three months, only 56% of UK companies tried to recruit new employees. This proportion is 3 percentage points lower than the 59% in the second quarter, which is the lowest level since the second quarter of 2021. More than 52% of retail enterprises and 54% of marketing and communication enterprises are unwilling to recruit new employees.
The key reason for the continuous slowdown in the UK labor market is the pessimism of enterprises and residents about the future. Consistent with the low willingness of enterprises to recruit, the current enthusiasm for investment in UK enterprises is also very low. The survey data recently announced by the Institute of Directors (IOD) shows that the confidence index of UK entrepreneurs plummeted to the lowest level since December 2022 in September, and the willingness of enterprises to invest also fell to the lowest level since September 2020."The decline in the inactivity rate of the UK economy and the overall increase in employment rates demonstrate the improvement in the UK labor supply market," said Alexandra Hall-Chen, Chief Policy Advisor for Employment at the Institute of Directors, in response to the latest labor market statistics. The data shows that from June to August, the inactivity rate of the UK economy was 21.8%, lower than the level a year ago and also lower than the previous three months. The employment rate in the UK from June to August was 75%, also higher than the level a year ago.
Furthermore, the weak growth momentum of the UK economy will also prompt the Bank of England to further implement interest rate cuts. "Although the UK economy achieved growth in August, businesses' uncertainty about the future has greatly increased. Factors including high interest rates are still suppressing the growth of the UK economy," said David Bharier, Head of Research at the British Chambers of Commerce.