Sterling rallied following strong labour data which has now strengthened the case for a Bank of England interest rate rise in December.
ONS jobs report
The ONS data showed that job vacancies reached 1.17 million in the three months to October due to worker shortages. The UK economy is recovering but inflation remains a concern. The unemployment rate has fallen to 4.3%, which is much lower than expected and near to its pre-pandemic level. British employers hired more people in October after the end of the government's furlough scheme. The number of business staff on payrolls increased by 160,000 to reach 29.3 million, which is 0.8% higher than February last year before the pandemic began.
Sam Beckett, head of economic statistics at the Office for National Statistics (ONS), said: "It might take a few months to see the full impact of furlough coming to an end, as people who lost their jobs at the end of September could still be receiving redundancy pay. However, October's early estimate shows the number of people on the payroll rose strongly on the month and stands well above its pre-pandemic level."
Rushi Sunak, the chancellor of the exchequer, said that Tuesday’s report shows the success of the job retention scheme: “Today’s numbers are testament to the extraordinary success of the furlough scheme and welcome evidence that our Plan for Jobs has worked. We know how vital keeping people in good jobs is, both for them and for our economy – which is why it’s fantastic to see the unemployment rate falling for 9 months in a row and record numbers of people moving into employment. Our Plan for Jobs is at the heart of our vision for a stronger economy for the British people, with schemes like Kickstart and Sector Based Work Academies continuing to create opportunities for people up and down the country.”
The ONS also said that in October the number of people seeking out work benefits fell by 14.9K, despite that after the end of the government's job support scheme an increase in unemployment would have been expected.
Bank of England and interest rates
The jobs data has increased the likelihood that the Bank of England will raise interest rates from their record lows before the end of the year. Analysts have expected the Bank to raise rates earlier this month, but it decided to keep them on hold. The governor of the Bank of England Andrew Bailey told MPs that the Bank wanted to see evidence and official data of the impact of the end of furlough before it made a move.
The pound rose ahead of the jobs report following the parliamentary appearance of members of the Bank of England who said an interest rate rise could happen at any of the upcoming Monetary Policy Committee meetings. Appearing before UK lawmakers on Monday Bank of England governor Andrew Bailey said that the labour market is heading in a direction consistent with higher interest rates. He said that the labour market is "becoming significantly tighter" and that the transition out of the furlough scheme has not led to higher unemployment. Bailey noted that the MPC will have a clearer picture at the next policy meeting.
Paul Dales, chief UK economist at Capital Economics, explained that the data was positive and if the next jobs report is equally strong then the Bank will have enough reasons to raise interest rates. He said: "Overall, it doesn't look as though the labour market loosened much after the end of the furlough scheme. If the next labour market release on 14 December tells a similar story, we think that will be enough to prompt the Bank to raise interest rates from 0.10% to 0.25% at the meeting on 16 December."
The Bank believes that a strong labour market could also mean higher inflation which can be rectified by higher interest rates.
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