Bank of England Decision Gets Tougher, GBP to EUR Rate Holds 1.182

January 21, 2025 - Written by Frank Davies

STORY LINK Bank of England Decision Gets Tougher, GBP to EUR Rate Holds 1.182

The latest UK data has complicated the Bank of England’s policy decisions. Although it clearly suggests that the labour market is weakening, wages growth is not compatible with inflation at the 2% target.

At this stage, the consensus is that the Bank of England (BoE) will still pull the trigger and cut rates in February, but the wages data is liable to maintain a cautious overall stance.

UK yields were little changed while the Pound to Euro (GBP/EUR) interest rate was unable to make headway and settled around 1.1830, close to 4-month lows near 1.1800 recorded on Monday.

The Pound to Dollar (GBP/USD) exchange rate traded close to 1.2250 with Trump’s trade talk maintaining volatile trading conditions.

The UK unemployment rate increased to 4.4% for November from 4.3% and slightly above consensus forecasts of 4.3%.

The number of employees on payrolls declined 32,000 for November and provisional data recorded a further 47,000 for December.

There was also a small annual decline which suggests a cooler labour market and vacancies declined for the 30th successive month.

The wages data was firm, however, as headline and underlying average earnings both increased to a 5.6% in the year to November from 5.2%.

This was in line with market expectations, but underlying growth was at a 6-month high with private-sector wages at a 10-month high of 6.0%.

Liz McKeown, ONS director of economic statistics, noted firm wages data; “Pay growth picked up for a second consecutive period, again driven by strong increases in the private sector.”

She also noted the divergence; “The number of employees on payroll, drawn from tax data, fell in the three months to November. Meanwhile, our household survey also reported a fall in the number of employees, with a rise in unemployment over the same period.”

MUFG commented; “There is a degree of stickiness of course that remains evident in the wage data which will be a concern to the BoE but we suspect this wage data will not deter the MPC from cutting the key policy rate at the next meeting in February.”

The bank added; “The less aggressive than expected start to US trade tariff policies could also ease BoE concerns over the threat to global inflation and further underlines the prospect of a cut.”

National Institute of Economic and Social Research economist Monica George Michail does not expect the BoE to act; “Given today’s figures and the global uncertainty around inflation, we expect the Bank of England to hold rates in the next MPC meeting in February.”

According to Pantheon Macroeconomics economist Rob Wood; “We expect them to cut rates 25bp in February.”

On a medium-term view, he added; “Pay is rising far too fast to return sustainably to the target soon. Pay growth and rising inflation suggest the MPC will have to be cautious, looking to only three rate cuts this year, rather than the four they implicitly suggested last November.”

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TAGS: Pound Euro Forecasts