The job market stabilizes with the slowest wage growth in nearly five years! Bank of England welcomes a "stabilizer" as the probability of holding rates steady next week increases

According to Zhitong Finance APP, ahead of the Bank of England's latest interest rate decision announcement next week, official data from the UK shows further signs of stabilization in the country’s labor market. The Office for National Statistics (ONS) said on Tuesday that the number of payroll employees in the UK decreased by 4,000 in June, compared to an increase of 3,000 in May. This result was better than economists’ prior expectation of an 8,000 decrease. For the three months ending in June, the number of UK job vacancies stood at 712,000, basically unchanged from the previous statistical period. The unemployment rate held steady at 4.9% in the three months to May, although the ONS warned that due to a temporary issue, the quality of this unemployment rate estimate had “deteriorated”; the youth unemployment rate for those aged 16-24 edged up to 16.4%, reaching the highest level since 2014.

The change in the number of UK payroll employees shows signs of stabilization

Meanwhile, wage growth in the private sector has slowed to its lowest level since 2020. The ONS reported that for the three months ending in May, wage growth excluding bonuses remained at 3.4% year-on-year. The private sector wage growth most closely watched by the Bank of England rose 2.9% year-on-year in the three months ending in May, marking the slowest pace since October 2020.

Wage growth in the UK private sector has fallen to its lowest level since 2020

Preliminary data above indicates that, on the eve of Andy Burnham assuming office at No.10 Downing Street, the previous downward trend in the UK labor market may be close to bottoming out. Andrew Hunter, Senior Economist at Moody’s Analytics, stated: “The UK labor market appears to be gradually stabilizing after a long period of weakness. This suggests that the labor market has withstood the recent energy shocks, while the long-term drag caused by national insurance hikes and minimum wage increases is finally beginning to fade.”

For Burnham, the new Prime Minister inherits an economic environment full of challenges — sluggish growth and a consistently rising unemployment rate in recent years. In his first speech after taking office on Monday, Burnham vowed to build a “new economic model” and provide UK households with more “breathing room.” On Tuesday, he also announced plans to remove VAT from energy bills.

Signs of stabilization in the UK labor market are expected to support the Bank of England’s decision to keep rates unchanged next week. The labor market’s status is crucial for Bank of England policymakers. Bank officials hope that weak labor demand will help contain a second-round effect of inflation triggered by surging energy prices.

Since the first year of the last Labour government led by Keir Starmer, when employment taxes and the minimum wage were raised, ONS statistics show the number of payroll employees has been on a downward trend. After 2026, new uncertainties emerged in the labor market due to the energy shock caused by the Middle East war and the UK government’s plan to further strengthen worker protections.

Economists said: “The overall number of payroll employees continues to decline and job vacancies have fallen further, which suggests rising energy costs and tighter financing conditions may be dampening labor demand. These data provide justification for the Bank of England to keep rates unchanged at its July meeting.”

The market currently generally expects the Bank of England to keep rates unchanged next week. Traders see only a 14% chance of a 25 basis point rate hike by the Bank of England. However, given escalating tensions between the US and Iran, investors still expect the Bank of England to implement one rate hike before the end of the year.

Ruth Gregory, Deputy Chief UK Economist at Capital Economics, commented: “The labor market remains very weak, which continues to indicate that the current environment is insufficient to generate significant second-round inflationary effects. Today's data have not altered our baseline view that the Bank of England will not further raise rates from the current 3.75%.”