Impact of jobs data on base rate decision

Many will have hoped that last month's rate hike would have been the final one, especially after Andrew Bailey's recent comments suggesting that a peak in interest rates could be just around the corner. However, Tuesday's mixed basket of economic data might still trigger another 25bps hike on 21st September. But although wages including bonuses continued to rise, the MPC may find some respite in the fact that this was due to one-off payments made in June and July to the NHS and civil service, as wages excluding bonuesesremained unchanged at 7.8%. More encouragingly for Bank Rate, the unemployment rate has continued to tick up with the number of vacancies heading in the other direction, thereby easing wage pressures moving forward. Nonetheless, all eyes will now be on next week's crucial CPI inflation print. Considering August's poor services PMI data, investors will be hoping that lower-than-expected core and services inflation could trigger a pause at the next MPC meeting.

There are two factors driving up wages. To begin with, some of it is being directly fuelled by militant unions forcing the government's arm to increase public pay well and truly above desired inflation levels: rail unions, junior doctors, consultants, nurses unions. Most of them are asking for and quite successfully getting pay increases at significant levels. Separately, the public expectation of future inflation has become a self-fulfilling prophecy. People anticipate higher prices and are therefore demanding higher wages, leading to a wage-price spiral. Large public spending on money-pit projects such as HS2 are equally important factors. My money is on a 25bps rate increase in the next MPC meeting, with rates plateauing at 5.50%-5.75% for the foreseeable future.

With unemployment rising to 4.3% from 3.8% in the latest quarter, it appears higher interest rates are finally starting to bear down on the UK economy. Unfortunately, until core inflation starts falling significantly, we're likely to see further tightening of the economic straightjacket.

Due to wages increasing and keeping pace for the first time in a long time with inflation, it is looking likely the Bank of England will increase rates further at the end of the month, perhaps overcompensating to get inflation under control. This latest wage data will just give them more impetus to do so, and record wage growth headlines will just further reinforce this group-think from the Monetary Policy Committee.

The hope is that lower employment and higher unemployment data see the Bank of England's Monetary Policy Committee stop singing to Rishi's tune and pause its relentless series of rate hikes.