UK unemployment rate fell to 3.8% in February and wages increased, lending support to the pound.

According to data released from the Office for National Statistics (ONS) on Tuesday morning, UK average weekly earnings rose 5.4% in February. The data reflects persistent wage inflation, which should encourage the Bank of England to raise interest rates again in May. The wage and employment data comes at a time when UK economic momentum is falling, while inflation is rising, and this could push the pound lower.

With higher inflation, weaker consumer confidence and higher credit growth, the outlook for the pound seems disappointing.

UK jobs report

The UK’s unemployment rate fell below its pre-pandemic levels to 3.8%, but these was due to employers hiring less staff and people leaving the labour force. Regular pay fell by 1% over the last year after adjusting for inflation.

Employment rose with 32,485 people currently employed. UK employment rate remained at 75.5%, 1.1% lower than before the pandemic.

The ONS noted that economic inactivity rate increased by 0.2% to 21.4% in December 2021 to February 2022, with 76,000 more people becoming economically inactive, as many were looking after home or family, retired or were sick. Today’s jobs report has shown that 487,000 more people were considered economically inactive, mostly older workers, due to long-term sickness. Long Covid is expected to be the main cause for this increase.

Responding to today’s release of labour data, Minister for employment, Mims Davies, said: “With the unemployment rate returning to the lowest we have seen in nearly 50 years, it is clear our Plan for Jobs has worked – protecting livelihoods and businesses throughout the pandemic. Behind these ONS figures we know this is a difficult time for many workers and families. We’re doing everything we can to help, with our Way to Work scheme which is supporting people coming through the doors of our Jobcentres to move into better paid, higher skilled work. As well as increasing the National Living and Minimum Wage all backed up by over £22bn of targeted investment.”

Ben Harrison, director of the Work Foundation thinktank, said that more government help for struggling households was needed since today’s statistics showed “a mixed picture for the UK’s labour market recovery with employment stationery at 75.5% and unemployment dropping to 3.8%. However, the vacancy rate remains high at 1.3 million, and economic inactivity continues to rise to 21.4%. Crucially, workers and job seekers are being hit by the largest fall in living standards on record as inflation outpaces wage growth. Many are struggling to make ends meet as regular pay growth is at 4% (excluding bonuses) but inflation continues to rise, with the Bank of England predicting inflation will reach 8% in spring and could rise further later in the year.”

Bank of England

The data today is expected to reinforce the case for further interest rate hikes by the Bank of England. Some economists believe the Bank will proceed to hike by another 25bp at its next meeting in May, but they believe the hiking cycle will end there, with no further rate hikes. They noted that the market will begin to adjust its interest rate hike expectations lower and this will hurt the pound.

There are also increasing concerns that the British economy is facing a recession, and this is why the BoE is cautious and less aggressive about tightening monetary policy.

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