UK wage growth continues to maintain its strength, complicating prospects for a potential interest rate reduction. Official data from the Office for National Statistics (ONS) revealed that nominal weekly earnings, excluding bonuses, rose by 6% from February to April. This figure aligns with the previous period but falls slightly below the anticipated 6.1%.
Weekly earnings inclusive of bonuses held steady at 5.9%, surpassing the 5.7% forecast by economists. This robust wage growth follows a 10% increase in the national living wage for workers over the age of 21, raised to £11.44 from 1 April. For the first time in nearly a year, the headline earnings figure has not decreased. However, the unemployment rate for the same period climbed from 4.3% to 4.4%, marking the highest level since September 2021 and exceeding predictions of no change. This estimate remains provisional due to lower response rates to the ONS workforce survey.
The sustained wage growth is likely to delay the UK’s first interest rate cut since 2020. Financial markets now anticipate a reduction from 5.25% to 5% in September. Initially, investors expected up to seven rate cuts this year; however, the revised expectation is now limited to two or three. The Bank of England’s Monetary Policy Committee (MPC) will make its latest decision next Thursday, preceding the 4 July general election. It is widely anticipated that interest rates will be held steady for the tenth consecutive month.
Rob Wood, chief UK economist at Pantheon Macroeconomics, commented that it would be unconventional for the MPC to cut rates while wage growth remains close to 6%. He suggests the committee may opt to wait until September. Despite strong earnings figures, other labour market indicators present signs of deceleration. Vacancies dropped by 12,000 to 904,000, marking nearly two years of declines. The overall employment rate decreased to 74.3%, a three-year low, while monthly payroll growth diminished in April and May.
The economic inactivity rate rose to 22.3%, the highest since 2015, adding pressure to retain the workforce. Benefit claimants increased by 50,400 between March and April, the largest monthly surge since the pandemic. Economists at Capital Economics forecast that the MPC might vote for a rate cut in August, provided other metrics such as pay settlements and upcoming inflation data show improvement. Forecasts suggest that headline consumer price inflation may have dropped from 2.3% to 2% in May, aligning with the Bank’s target for the first time since 2021. Nevertheless, inflation is expected to exceed 2% for most of the year post-May.
Separate surveys, including the Bank’s decision-makers’ panel, indicate that companies are reducing their wage bill forecasts for the forthcoming year to approximately 4%. Economists posit that wage growth needs to decline to 2-3% for inflation to diminish and remain at the Bank’s 2% threshold. The Resolution Foundation, a think-tank, pointed out that the subsequent government will need to focus on addressing a slowing labour market and dwindling employment rather than high price growth. Principal economist Nye Cominetti noted that average earnings remain over £14,000 a year below their pre-financial crisis trajectory after 16 years of wage stagnation.
The resilience of UK wage growth is creating a challenging environment for implementing interest rate cuts. While this strength in earnings is a positive indicator for workers, it complicates the broader economic strategy aimed at stabilising inflation and fostering sustainable employment growth.
