Rolling coverage of the latest economic and financial news
The health (or otherwise) of Britain’s jobs market will be on the Bank of England’s mind when it sets interest rates today – and the latest update from retailer Next may concern them.
Next has told the City this morning that its vacancies have fallen across the board, down 35% overall over the last two years, but with deeper falls at its stores.
Increasing cost of employment (due to the higher minimum wage, and increased employers’ national insurance contributions)
Mechanisation and AI, which are replacing some manual and desk-based functions
Increasing legislative barriers to employment (warning that the upcoming Employment Rights bill will reduce jobs and eliminate earnings potential).
The pressure on employment is unlikely to be like past recessions, where structural changes have wiped out whole industries, resulting in mass redundancies and regional slumps. These changes are likely to affect people employed in most sectors, and so the effects will be more gradual over time.
Our guess is that most companies will respond to the increasing cost of employment by not filling vacancies, rather than large-scale redundancies (that has certainly been our experience). This, to some extent, is good news because it means we are unlikely to see widespread or sudden economic shocks.
We expect the BoE to slow the pace of balance sheet reduction from £100bn to £60bn per annum (consensus £72bn). That would both keep the amount of active sales the BoE undertakes broadly steady and decrease the payments HM Treasury (HMT) makes to the BoE to cover its losses, thereby reducing the budget deficit. Slower QT would be a win-win for bond holders.
The bonds on the BOE’s balance sheet have been losing value as bond prices have fallen, and yields have risen in recent years. In contrast, the amount that the BOE pays in interest on bank reserves has been rising, and the BOE has required Treasury transfers to manage this.
Ultimately, this will be for the Chancellor to solve, and it could lead to bank taxes included in this Autumn’s budget.
The vote split. We expect a 7-2 vote split to keep Bank Rate on hold. Alan Taylor and Swati Dhingra, we think, will opt for a quarter-point rate cut in September.
The forward guidance. If there’s any surprise in the MPC minutes, it’s likely to come from the Bank’s forward guidance. There are three paths here the MPC can take: one, stick to its current guidance of ‘gradual and careful’ rate cuts, two, tweak its current guidance to ‘gradual and cautious’ rate cuts, or three, simply, drop the current guidance entirely. We place a 40/20/40 probability for each of the three paths. Indeed, there’s a material risk, in our view, that the MPC abandons its ‘gradual and careful’ guidance surrounding the downward path for Bank Rate.