Pound sterling is bouncing back against its major rivals on Tuesday following the release of positive UK labour market data for the three months ending December. The Office for National Statistics (ONS) reported that the economy added 107,000 workers, well above the 35,000 recorded between September and November.
The ILO unemployment rate remained at 4.4 per cent, while it was expected to accelerate to 4.5 per cent. Investors were concerned about the employment data as business owners were disappointed by Chancellor of the Exchequer Rachel Reeves’ announcement of an increase in employers’ National Insurance (NI) contributions. In the Autumn Budget, Reeves increased employers’ social security contributions by 1.2% to 15%, which will take effect from April.
The employment data also contradicts Bank of England (BoE) Governor Andrew Bailey’s warning that he sees some weakness in the labour market, as he said in an interview with BusinessLive on Monday. Bailey also said in the interview that the economic outlook remains sluggish, with unexpectedly positive fourth-quarter gross domestic product (GDP) data not changing the “big picture.” In its February monetary policy statement, the BoE cut its growth forecasts for the year to 0.75 per cent.
In addition to the strong employment figures, data on average earnings, a key indicator of wage growth, accelerated in the three months ending in December. Average earnings excluding bonuses accelerated to 5.9%, as expected, from the previous reading of 5.6%. Meanwhile, average earnings including bonuses rose 6 per cent, above forecasts of 5.9 per cent and the previous reading of 5.6 per cent.
High wage growth will raise inflation expectations and force the BoE to keep interest rates at 4.5%. Investors will focus on the UK Consumer Price Index (CPI) data for January, which will be released on Wednesday.
