Labour market health points to interest rate rise

Laith Khalaf
12 October 2021

•    The number of employees in September was back to pre-COVID levels, according to latest data from the ONS
•    Job vacancies hit a record high or 1,102,000 in July to September 2021
•    UK unemployment falls to 4.5%
•    Average regular pay fell to 6% in June to August 2021, with underlying earnings growing at between 4.1% and 5.6%

Laith Khalaf, head of investment analysis at AJ Bell, comments:

“The dials in the labour market are pointing towards an interest rate rise, with job vacancies at a record high, unemployment falling, and the number of payrolled employees back to pre-pandemic levels. The only sign that tightness in the labour market might be easing was the continued fall in average earnings, as base effects start to fall out of the equation. The record number of job vacancies suggests even this moderation may peter out, as employers find themselves competing for workers with cold hard cash. 

“The number of job vacancies is now within touching distance of the number of unemployed people in the country, which suggests this is not simply a transitory or frictional matter. However the jury is still out on exactly how dry the labour market is until the full effects of the end of the furlough scheme can be seen. If lots of previously furloughed jobs are axed, the resulting job seekers could fill some holes, though their skills probably won’t map neatly across to the jobs being advertised.

“The market has been rapidly pricing in an interest rate rise in recent weeks, with the chances of a hike this year now standing at two in three. That seems a little rich, seeing as the last time the UK’s interest rate setting committee met, they unanimously agreed to keep interest rates on hold. The Bank of England is expecting elevated inflation this winter, but the recent spike in gas and oil prices will test their resolve, as the increasing cost of these vital economic inputs will mean that inflation will be higher, and potentially longer lasting. The UK now looks firmly on the path to higher interest rates. The question is how quickly the central bank takes us there.”

Laith Khalaf
Head of Investment Analysis

Laith Khalaf started his career in 2001, after studying philosophy at Cambridge University. He’s worked in a variety of roles across pensions and investments, covering both the DIY and the advised sides of the business. In 2007, he began to focus on research and analysis, and has since become a leading industry commentator, as well as a regular contributor to the financial pages of the national press. He’s a frequent guest on TV and radio, and for several years provided daily business bulletins on LBC.

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