ONS: UK unemployment rate rises to 3.9% – what does this mean for interest rates?

UK unemployment crept up in the first three months of 2023, data from the Office for National Statistics showed.

The number of payrolled employees in April also decreased for the first time since February 2021, reflecting a “triple whammy of credit tightening, rising interest rates and rampant inflation”, said Myron Jobson, senior personal finance analyst at interactive investor.

Indeed, these factors have weighed on business confidence, reflected by the tenth consecutive fall in the number of vacancies.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The ONS figures also showed that at 75.9%, the employment rate was 0.2% higher than in the final quarter of December, and the economic inactivity rate also decreased by 0.4%, driven by people aged 16-24 searching for a job. Analysts believe the cost of living crisis is driving more people back into the workforce.

Inflation eats into pay growth

Growth in average total pay, including bonuses, was 5.8%, while growth in regular pay excluding bonuses was 6.7% between January to March.

But when adjusted for inflation, growth in total and regular pay fell by 3% and 2% respectively.

“With inflation still sky high the focus remains on wage growth and whilst the public sector has lagged, its private counterpart’s wages have shot up by a number not seen for twenty years,” says Danni Hewson, head of financial analysis at AJ Bell.

“Industrial disputes have been fuelled by the simple fact that even at 5.6% growth wages aren’t keeping up with inflation and day-to-day life has become harder and harder to fund.”

What does this mean for interest rates?

A recent survey by the Bank of England (BoE) found companies expect to keep staffing levels flat in 2023, with hiring freezes and redundancies.

But private sector employers are also expected to increase salaries by 5% in 2023, the most in at least 11 years as they look to fill vacancies and retain staff.

This could add pressure on the BoE to raise rates again.

“Wage growth is one area that has gained a lot of headlines as leading figures have asked for pay restraint, and the Bank will continue to watch it with a keen eye,” says Richart Carter, head of fixed interest research at Quilter Cheviot.

“While wage growth is a lagging indicator, today’s data show wages have continued to climb, but the pace at which they are growing has slowed.”

The 6.7% growth in regular pay was just 0.1% higher than the previous quarter.

Rising wages mean businesses might continue increasing prices, which could push inflation higher, prompting the BoE to keep its foot on the pedal and continue hiking rates.

“The Bank is left facing a tricky task of knowing when enough is enough on interest rates, and this morning’s data may mean we are not quite at the end of the hiking cycle yet,” adds Carter. “It will be hoping wage growth continues to moderate and doesn’t threaten to rip up the inflation forecasts it is relying on when it comes to interest rate setting.”