Morgan Stanley economists said that given the latest data on the UK labor market, the likelihood of monetary policy easing by the Central Bank in the next few months is "greatly underestimated." The economists added that the labor market no longer looks "tight".
The Office for National Statistics (ONS) said that from from November 2023 to January 2024, the growth in average total pay (including bonuses) and regular pay (excluding bonuses) was 5.6% per annum (+5.8% in the previous three months) and 6.1% per annum (+6.2% in the previous three months). Economists had expected an increase by 5.7% and 6.2%, respectively. The growth in average total pay was the weakest since July 2022, while regular pay grew at the weakest pace since October 2022. Adjusted for inflation, wage growth in real terms was steady at 1.4% for total pay including bonuses and 1.8% for regular pay excluding bonuses.
"We expect the Central Bank to begin easing monetary policy at the May meeting. However, we look for firmer Bank of England guidance next week. In the absence of this, the start of the rate cut cycle may be postponed to August. In general, we predict that the Central Bank will cut the rate by 1% by the end of this year," Morgan Stanley said.
Meanwhile, current pricing indicates about a 17% chance of a rate cut in May and about a 60% chance of such a move in June. As things stand, traders are only pricing in the first rate cut to be in August and expect a 0.75% rate cut by the end of the year.