The latest figures on wage growth have dampened the possibility of an interest rate cut next month, as they surpassed expectations. According to data from the Office for National Statistics (ONS), regular wage growth, excluding bonuses, increased by 6% in the three months leading up to March compared to the previous year. This figure remains unchanged from the previous month.
Total pay also remained steady at a revised 5.7% for the same period, despite economists predicting a decline in both readings. The ONS also reported a rise in the unemployment rate from 4.2% to 4.3%. Liz McKeown, director of economic statistics at the ONS, stated that there are signs of a cooling job market, with a decrease in employment and workers on payroll. She also noted a continued decline in job vacancies for the 22nd consecutive month, although still above pre-pandemic levels. With unemployment on the rise, the number of unemployed individuals per vacancy has also increased, approaching levels seen before the pandemic.
The release of these figures coincides with ongoing speculation about the timing of an interest rate cut by the Bank of England. The Bank, which recently indicated progress in efforts to lower inflation, has maintained the rate at 5.25% since last summer. The rate-setting committee is awaiting a sustainable return to its 2% inflation target before implementing a rate cut. However, wage growth remains a concern as it is currently twice the rate of price growth, potentially leading to higher prices through increased discretionary spending.
According to Huw Pill, chief economist at the Bank, the current rate of wage growth is significantly higher than what is necessary to meet the inflation target sustainably. Next week, inflation figures for April are expected to show a significant decrease in the main consumer prices index (CPI) due to a sharp decline in energy bills. Economists forecast a figure just above 2%. However, the Bank remains cautious as they believe inflation could rise back up to 3% in the second half of the year. Financial markets have a 53% chance of a rate cut during the next monetary policy committee meeting on June 20th.
While the Bank faced criticism for its restrictive monetary policy during the UK’s recession in the second half of 2023, the economy has since performed better than expected. This poses a challenge for the MPC, as seen in separate ONS data released last week showing a 0.6% increase in gross domestic product during the first quarter of the year. Similar to the wage figures, the Bank is concerned that this growth could fuel inflation. The MPC has stated that their decisions will be based on data. Ahead of the June 20th meeting, there will be another employment report from the ONS and two sets of inflation figures.
Yael Selfin, chief economist at KPMG UK, believes that next month’s pay data will be crucial in determining the impact of April’s National Living Wage increase. If the data aligns with expectations of a modest boost and keeps annual pay growth on a downward trend, it could sway the MPC towards a more dovish sentiment before their June vote. Similarly, Rob Wood, chief UK economist at Pantheon Macroeconomics, believes that the Bank will support a rate cut at the next meeting. He stated, “Despite our concerns over the jobs data, the labor market continues to gradually ease, providing the MPC with a reason to cut rates in June.”
