The Bank of England is expected to follow the Fed in coming months, launching a rate cycle before midyear. The UK labor market continued to strengthen this week, with a strong gain in jobs and another drop in the unemployment rate to 5.2%. The widely-watched weekly earnings growth slowed sharply and raised more questions about whether the tighter labor market is exerting the typical influence on pay growth. 

However, a drop in average hours worked appears responsible for the weakness in this measure of earnings, with hourly pay growth showing a much stronger trend. Unit labor cost growth is expected to rise above 2% next year as pay growth moves further ahead of productivity gains, prompting the BoE to start raising rates from 2Q. 

For now, however, the moderate advance in unit labor costs and consumer prices creates scope for the BoE to remain patient. And at this stage the main risk is that policy tightening begins a little later than expected.