The UK labour market is continuing to soften and provide ammunition for the 'doves' in the Bank of England who want to push for more interest rate cuts, but analysts and economists said the next policy move is not likely to arrive until at least Decemberm, if not February.
Data from the Office for National Statistics showed wage growth continues to soften, particularly in the private sector, with average weekly earnings for regular pay cooling to 4.4% in the three months to August, while the jobless rate edged higher to 4.8% from 4.7%.
Vacancies dropped to a new multi-year low of 717,000, while redundancies rose by 113k, and payrolls shrank by roughly 10,000 in September, while jobless claims rose by 25,800.
Deutsche Bank’s chief UK economist, Sanjay Raja, a rate cut by the end of the year is potentially being "underpriced" by markets, and he is predicting that it will be at the December meeting of the BoE's monetary policy committee (MPC).
He said it is clear that "slack continues to build in the labour market", though all data can be subject to revision - "and should be taken with a pinch of salt" due to issues with the ONS forecasting model in recent years.
This slack was evident in easing wage pressures due to the softening labour market, with hiring plans remaining stalled and a spike in the jobless rate that should be "worrying" for the MPC.
"Put simply, the jobs market is just not keeping up with rising labour force participation. "What does this mean for the MPC? Today’s data should give the doves some ammunition while providing the centrists on the MPC some food for thought."
Although consumer price inflation is expected to rise to near 4% in September, Raja said economic dynamics in the medium term pointed to weaker price momentum, while wage bargaining power has softened and private sector pay settlements are expected to land "comfortably around 3%" next year.
Economist James Smith at ING was not ruling out a December cut, as long as further falls in wage growth and softer services inflation follow.
However, he said he thinks February is "more likely, giving the Bank an extra month’s worth of data to look at before acting".
"We expect three cuts in 2026, which is more than markets are currently pricing," he added, based on the jobs data indicating that the longstanding issue of private sector wage growth is "finally showing signs of falling more rapidly", down to 4.4% from 6% around the turn of the year.
Smith said the decline is even sharper for the three-month annualised rate of private sector pay growth, which now sits at 2.4%.
"That suggests there’s a good chance now that the annual rate will fall below 4% by November."
This is "already baked into the Bank’s forecasts", he added, but after the consistently higher wage data than most economists had been forecasting in recent years, seeing these forecasts materialise "would go some way towards alleviating concerns about the upside risks to inflation" for the MPC.
Rob Wood at Pantheon Macroeconomics said he felt markets were "rightly" pricing a greater chance of an MPC rate cut by year-end, but Matt Swannell, chief economic advisor to the EY ITEM Club, felt pay growth was not slowing enough and "will give the MPC little confidence that they've overcome any stickiness in inflation".
He said that the labour market is continuing to gradually loosen, but while the data might suggest that the deterioration seen over the first half of the year is bottoming out as businesses adjust to April's change in employers’ National Insurance Contributions, "the labour market will likely remain under pressure due to weak demand, as the Government continues to tighten fiscal policy".
With inflation expected to remain at around double the BoE's 2% target, policymaker will "need to see more signs that inflationary pressures are easing before cutting interest rates".