UK labour market weakens as wage pressure stays subdued, ING says

A cooling UK labour market is offering little support to the idea that interest rates need to rise again soon, according to ING economist James Smith. In comments published by The Guardian Business in its live coverage of the latest economic and market developments, Smith argued that the Bank of England has room to stay patient unless a major energy shock linked to the Middle East war forces a rethink. The full report is available in The Guardian Business live update on UK wage growth and oil prices.

A slowing jobs market is not matching the growth story

If last week’s GDP figures suggest the economy may be gathering pace, the labour market is telling a different story. Smith said there is little evidence in hiring, vacancies or pay to show the UK is moving into a stronger phase of growth.

That mismatch matters because the Bank of England has been watching wage pressure closely as it decides how restrictive policy still needs to be. If employment demand is weak and earnings growth is losing momentum, the case for keeping borrowing costs elevated becomes less compelling. Smith’s view was that the labour market is cooling enough to remove the need for another rate increase, provided energy prices do not surge sharply and stay high for an extended period.

Public hiring remains firm while private demand softens

One of the clearest features of the current labour market is how uneven it has become. Government hiring is still running at a solid pace, continuing a trend seen throughout this year. Smith said payroll growth is advancing at a 1.1% annualised rate over three months, although he questioned how durable that can be if public spending plans become more restrained.

By contrast, sectors that depend on household spending are under pressure. Hospitality and retail have been consistently cutting jobs, and Smith said the pace of decline appears to be worsening. He linked that weakness to the effects of tax and minimum wage increases introduced last year. Outside those consumer-facing industries, the rest of the private sector is broadly flat. Apart from a more positive KPMG/REC hiring survey last week, most other surveys still do not suggest a swift improvement in hiring intentions.

That split between public and private activity gives a more cautious reading of the economy than headline growth data alone. The labour market, in Smith’s view, remains a better guide to underlying momentum than the stronger parts of the GDP picture.

Pay growth is diverging across the economy

The wage data reinforce that message. Smith pointed to a sharp difference between pay growth in government and the private sector. Earnings are rising by 6.1% across government, compared with 2.8% in the private sector.

He noted that the private-sector figure is being slightly distorted by compositional effects, a point the Bank of England has also highlighted. Even so, the broader picture is not one of wage acceleration. Instead, pay growth appears to be cooling in the areas of the economy that matter most for inflation pressure.

That matters because the Bank has repeatedly treated wage growth as a crucial signal for future services inflation and for how quickly price pressure might fade. If the labour market is easing and pay growth is no longer building momentum, policy makers may see less need to keep tightening.

Vacancies are falling and unemployment is steady enough for now

Another indicator pointing to slack is the steady decline in vacancies. Smith said job openings continue to fall gradually and remain well below the levels seen before the Covid pandemic. That suggests employers are less willing to expand headcount aggressively, even if parts of the economy are no longer contracting.

He also cited the unemployment rate as further evidence of a cooler labour market, while acknowledging that the latest reading carries reliability issues. Even with that caveat, he said there is little sign of a renewed rise in wage growth. That point is central to the Bank of England’s policy outlook because a renewed pay surge would be one of the clearest reasons to consider higher rates.

Instead, the labour market indicators point in the opposite direction: fewer vacancies, softer private-sector pay, and continuing weakness in consumer-facing industries.

What comes next for rates and why energy still matters

On Smith’s reading, the Bank of England should keep interest rates unchanged until next spring. He said that only a severe and prolonged increase in energy prices, driven by the Middle East conflict, would alter that trajectory in the near term.

Beyond that, ING’s forecast is for policy easing rather than further tightening. Smith said the bank could cut rates at least twice in 2027. That is a longer-term call, but it reflects the same basic judgement running through his comments: the labour market is cooling, wage growth is not re-accelerating, and the pressure on the central bank to act more aggressively is fading.

For now, the message is one of caution rather than urgency. Even if the wider economy is beginning to stabilise, the labour market is not yet showing the kind of strength that would justify a fresh move higher in rates.