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The U.K. labor market showed signs of weakening in May, with the unemployment rate climbing to 4.7%, surpassing expectations and marking its highest level since June 2021. This increase was higher than the anticipated 4.6% for the period, signaling a slight deterioration in the labor market dynamics.
Additionally, pay growth, excluding bonuses, slowed down to an annualized rate of 5.0% in the three months leading to May, down from the revised figure of 5.3% from the prior month, which had previously been reported as 5.2%. This moderation in wage growth, coupled with the rising unemployment rate, is expected to play a pivotal role in shaping the Bank of England’s upcoming monetary policy decisions.
In response to the economic slowdown, the Bank of England, which has already lowered interest rates by four quarter-point steps since August of the previous year, is widely expected to cut rates once more at its August meeting. These anticipated rate cuts are seen as necessary to stimulate economic activity amidst a weakening labor market and subdued growth prospects.
Despite these challenges, inflation in the U.K. has continued to rise. Consumer price inflation surged to 3.6% in June, marking its highest level in over a year. While this increase in inflation was anticipated by the Bank of England, the central bank maintains its forecast that inflation will return to its target by the first quarter of 2027.
Further complicating matters, GDP data for May showed an unexpected decline in economic output, adding pressure on policymakers to act decisively. Bank of England Governor Andrew Bailey has indicated that interest rates will likely follow a gradual downward path, driven by weaker labor market conditions and ongoing challenges in economic growth.
The outlook for the U.K. economy remains cautious, with the labor market trends, inflation, and GDP data likely influencing the Bank of England’s policy actions in the coming months.
