Title: Pound Holds Steady as Strong Wage Growth Contradicts Weakening Labor Market
By Harry Robertson
LONDON, Sept 12 (Reuters) – The pound remained steady on Tuesday after data revealed that British wage growth stayed strong in July, even as the labor market weakened. The data presents an unclear picture ahead of the Bank of England’s decision next week.
According to the Office for National Statistics, British wages excluding bonuses were 7.8% higher than the previous year in the three months leading to July. This figure is in line with economists’ expectations and matches the record pace set in June. Wages including bonuses also increased, rising to 8.5% from 8.4% the previous month.
Despite the strong wage growth, the unemployment rate ticked up to 4.3% in July, compared to 4.2% in June. This development has left Bank of England policymakers in a difficult position, as the labor market continues to show signs of easing while wage growth remains resilient.
“The tightness of the labor market continued to ease in July,” said Ashley Webb, UK economist at consultancy Capital Economics. “But the further rise in wage growth will only add to the Bank of England’s unease and supports our view that the Bank will raise interest rates once more, from 5.25% currently to a peak of 5.50%, next week.”
Sterling initially rose after the release of the data but later pared its gains and was trading flat at $1.2507, following a 0.35% increase on Monday. The euro also saw little change, down 0.17% against the pound at 85.79 pence.
While the pound has been one of the best-performing currencies this year, up 3.4% since January, recent weeks have seen a decline as cracks in the UK labor market have started to show, coupled with a rise in the value of the dollar.
Bank of England rate-setter Catherine Mann emphasized on Monday that it was too soon for the BoE to halt interest rate hikes. She suggested that it was better for the central bank to be cautious and err on the side of raising interest rates too high.
Derivatives markets are currently indicating an 82% chance that the Bank of England will raise rates by 25 basis points next week, with an 18% chance of rates remaining unchanged.
The dollar index, which tracks the greenback against six major peers, rose 0.12% to 104.69 on Tuesday. It has seen a 5% increase since mid-July, attracting investors as the U.S. economy remains strong while other parts of the world have slowed.
As the Bank of England’s decision approaches, the contrasting dynamics in the UK labor market and the steady wage growth leave policymakers facing a challenging path forward in determining the appropriate course of action to strengthen the economy while mitigating risks.
(Reporting by Harry Robertson; Editing by Amanda Cooper and Ed Osmond)