"Steep Increases in Pay" Reported by IHS Markit in Latest U.K. Jobs Report, Increases Prospect of Bank of England Interest Rate Rise in May

Employment data British Pound

Above: Permanent vacancy rates increased fastest in the Midlands while London was a laggard. (C) Adobe.

Permanent placements rise at faster pace as temporary billings continue to expand sharply, meanwhile demand for staff moderates slightly but remains robust.

The results of a new survey into the U.K. jobs market conducted by IHS Markit/REC – published on January 9 – confirms the U.K. economy continues to create jobs at a robust pace while at the same time the availability of staff is seen tightening.

This supply and demand dynamic is seen to be providing the expected upward pressures on wages.

The IHS Markit/REC Report on Jobs provides the most comprehensive guide to the U.K. labour market, drawing on original survey data provided by recruitment consultancies.

We find the news to be supportive for Sterling over the long-run as higher wages are likely to prompt a number of successive interest rate rises at the Bank of England which will be worried about the inflationary pressures posed by increasing wages.

Currencies tend to show a positive correlation to rising interest rates, hence the data is broadly supportive of a stronger Pound Sterling going forward.

"We suspect the building evidence that the squeeze on real wages may now be subsiding will prompt the BoE to become more optimistic on the outlook for economic growth," says Derek Halpenny at MUFG in London.

Halpenny and his team are forecasting a stronger British Pound in 2018, partly as a result of the belief the Bank of England will raise rates at a faster-than-expected pace as they respond to wage growth.

MUFG reckon an interest rate rise might come as early as May.

"Permanent starting salaries continued to rise markedly in December amid reports of candidate shortages and robust demand for staff. Temp pay also increased sharply, with the rate of inflation quickening to a three-month high," reports IHS Markit and REC.

The findings come in the week after the ONS reported U.K. productivity growth hit a six year high as workers continue to produce more per hour worked. Higher productivity tends to be a precursor to higher pay as employers inevitably have to increase compensation levels for more productive staff.

The UK Report on Jobs shows permanent staff placements increased at the quickest pace since August at the end of the year as agencies reported on strong demand for staff. But, the availability of candidates to fulfil permanent roles declined sharply at the end of 2017, with the rate of deterioration among the fastest seen over the past two years.

The supply of temporary labour also fell at a historically marked pace in December, despite the rate of reduction softening since November.

The Midlands continued to signal the fastest increase in permanent placements at the end of the year. Meanwhile, the least marked rate of growth was seen in London.

“Employers as a response to these candidate shortages are offering increased starting salaries to attract staff but while this has been the case for some time it isn’t translating into significant wage growth across the economy yet," says Kevin Green, REC Chief Executive.

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