The unemployment rate in the UK was unchanged from the previous month in April at 5.5%, in line with estimates. The ILO based figure fell by 43,000 to 1.81 million in April, while the claimant count measure fell by 6,500 in May, giving a rate of 2.3%, slightly above estimates of 2.2%. Total employment in the UK rose by 114,000 to 31.1 million.
What caught the markets off guard however, were the average earnings data, which showed acceleration in April. Average weekly earnings rose by a much stronger-than-expected 2.7%, against a forecast of 2.1%. Upward revisions were made to previous months’ figures, with March’s reading revised up to 2.3% from 1.9%, reflecting a more buoyant wage growth performance than initially thought. Excluding bonuses, average weekly earnings were also up by 2.7%, against expectations of 2.5% and higher than March’s upwardly revised 2.3%.
Adding to the rising inflation expectations were the Bank of England’s minutes from its June meeting which signalled a change in tone to a more hawkish one. All members of the Bank’s monetary policy committee voted to keep interest rates and quantitative easing unchanged, but the decision was finely balanced for two members.
In the minutes, the Bank said that the headwinds that previously weighed on the economy had begun to ease and that many of the factors dragging inflation down in recent months were likely to “dissipate fairly shortly” and inflation should pick up “notably” towards the end of the year. Referring to the headwinds, the Bank said that as they ease over time, “the interest rate required to keep the economy operating at normal levels of capacity and inflation at the target was likely to continue to rise”.
There was no change to the Bank’s inflation outlook to the one published in May’s inflation report. The effects of the unusually low energy and food prices are expected to dissipate, with inflation picking up towards the end of the year. The biggest risks to global growth were identified to be the Greek debt negotiations and the slowdown in China’s economy but the Bank warned that there could also be spillovers from interest rate increases in other countries, notably the United States.
The pound rose sharply after the earnings data and BoE minutes as they reinforced the view that the Bank of England will start raising interest rates at some point in the first half of 2016. The euro plummeted to 0.7157 from 0.7212 before the release and against the dollar, the pound hit a one-month high of 1.5739.
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