UK Wage Growth at Two-Year Low Keeps BOE Rate Cut in Sight

UK wages grew at the slowest pace in over two years over the summer, a sign of easing inflationary pressures that keeps the Bank of England on track to cut interest rates in November.

(Bloomberg) — UK wages grew at the slowest pace in over two years over the summer, a sign of easing inflationary pressures that keeps the Bank of England on track to cut interest rates in November.

Average earnings excluding bonuses rose 4.9% in the three months through August from a year earlier, the Office for National Statistics said Tuesday. It was smallest increase since the second quarter of 2022 and in line with the median forecast in a Bloomberg survey of economists. Private-sector wage growth slowed to 4.8% from 5%. 

BOE policymakers are closely watching pay settlements for signs of underlying prices pressures that could make it harder to keep inflation around the 2% target. 

While wage growth remains above levels the BOE is comfortable with, it has slowed enough for the bank to begin moving rates out of restrictive territory. The central bank cut rates in August for the first time since the pandemic and markets are all-but pricing in another reduction next month.

“The further fall in wage growth in August, together with some signs that the labour market continued to loosen gradually, adds further support to widespread expectations that the Bank of England will cut interest rates from 5% to 4.75%,” said Ashley Webb, UK Economist at Capital Economics.

Unemployment unexpectedly fell to 4% in the latest three months, an historically low level and down from 4.4% in the spring. Economists had expected the rate to stay unchanged at 4.1%. The number of people in work rose a larger-than-forecast 373,000, the biggest increase on record.

However, economists have urged treating the employment data with caution, given the problems the ONS has experienced in collecting responses to its surveys. The official unemployment rate is likely to tick higher next month when a sub-4% reading for June falls out of the three-month data, in line with a broader picture of a cooling labor market.

Moreover, the latest figures largely pre-date the hit to business confidence caused by the new Labour government’s gloomy messaging on the public finances after it took office in early July. 

A survey by the British Chambers of Commerce this week found the proportion of firms attempting to recruit new workers fell in the last quarter to its lowest in three years. Vacancies fell by 32,000 to 841,000 in the three months through September, the lowest since the spring of 2021, today’s ONS figures show.

The slowdown, which reflects fears over the prospect of painful tax rises in the Oct. 30 budget, risks undermining the government’s stated ambition to lift Britain’s economic growth rate to the highest in the Group of Seven.

Key points from the labor market release:

• Total pay growth slowed to 3.8% in the three months through August, partly due to base effects after one-off payments to National Health Service workers and civil servants a year earlier
• Wages have outstripped prices for a year, with regular pay adjusted for CPI inflation at 2.6% in the latest three months
• Vacancies fell across most sectors on the quarter, with mining and quarrying and real estate activities seeing the largest decline. Still, they remain 5.7% above pre-pandemic levels
• The rise in employment was driven by a 141,000 fall in unemployment and 121,000 fewer inactive people
• The number of employees on payroll fell 15,000 between August and September to 30.3 million
• Reduced inactivity was driven by people moving out of long-term sickness. There was a 62,000 drop in people declaring chronic conditions, taking the 2.75 million total to the lowest level since the three months to September last year. It is still over 700,000 larger than before the pandemic
• The rate of economic inactivity – the number of people not in work or seeking a job – edged down to 21.8%, the lowest since last year

BOE Governor Andrew Bailey and his colleagues have suggested they favor a cautious approach to further cuts. While Bailey held out of the prospect of “more aggressive” cuts if inflation stays subdued, Chief Economist Huw Pill has warned against lowering borrowing costs “too far or too fast.” 

The labor market figures “will reassure the BOE that the risk of wage growth remaining persistent is receding,” said Yael Selfin, chief economist at KPMG.

The BOE deems sustained wage growth above 3% to be incompatible with its 2% inflation target. Pay is still rising strongly in sectors such as hospitality and construction, where many firms are still struggling to recruit scarce workers. 

Figures on Wednesday are expected to show inflation dipped below 2% for the first time since 2021, thanks to cheaper auto fuel and an easing of inflation in the services sector. However, the slowdown is expected to be temporary, with economists projecting inflation of around 2.5% by the end of the year on higher energy prices.