UK pay growth slows but remains high for the Bank of England

Wages in Britain grew a bit more slowly but still increased at a pace that would normally be too strong for the Bank of England (BoE), leaving in doubt the possibility of an interest rate cut in two weeks’ time.

A day after official data showed stubbornly high inflation pressure, Britain’s statistics office said earnings excluding bonuses grew by an annual 5.7 per cent in the three months to May.

That was down from 6.0 per cent in the three months to April and represented the slowest growth in core pay since the summer of 2022 when employers scrambled to increase salaries to hire and retain staff amid a shortage of candidates.

But it remained close to double the rate that would be consistent with the BoE’s 2 per cent inflation target.

While that is good news for many households after years of stagnant incomes, it could deny the new government of Prime Minister Keir Starmer the boost of an interest rate cut as soon as next month.

“A modest slowing in pay growth offers some good news for those looking for a rate cut in August,” Yael Selfin, chief economist at KPMG UK, said.

“But with annual pay growth excluding bonuses at 5.7 per cent, the Bank of England may be unwilling to risk an August cut in rates before the labour market has cooled sufficiently.”

Capital Economics, a consultancy, said it was pushing back its forecast for the timing of the first BoE rate cut to September from August, due mostly to the strong underlying inflation pressures reflected in Wednesday’s data.

Sterling was little changed after the wage but investors slightly increased their bets on a rate cut by the BoE on Aug. 1 - the date of its next scheduled monetary policy announcement - to about 40 per cent, up from around 33 per cent on Wednesday.

Total earnings, including bonuses, also grew by 5.7 per cent over the period, slower than 5.9 per cent in the three months to April.

Both pay readings were in line with forecasts in a Reuters poll of economists.

The BoE looks closely at regular wage growth in the private sector which cooled to 5.6 per cent, down from 5.9 per cent in the three months to April, marking the slowest increase since mid-2022.

“Rate setters will be encouraged by softer private sector pay growth,” Rob Wood, chief UK economist at Pantheon Macroeconomics, said. “We think an August rate cut is a very close call.”

Wood said pay growth was likely to slow as a boost from April’s big increase in the minimum wage fades and pay deals later this year are set against the backdrop of lower inflation.

Britain’s labour market - like those in many other economies - has stayed strong despite only sluggish growth in the economy. The combination of strong wage growth with slowing headline inflation meant workers saw the biggest real-terms increase in their basic pay since 2002, excluding the pandemic period.

The Office for National Statistics also said it was delaying the switch to a new version of its Labour Force Survey which had been due to take place in September.

The new Transformed Labour Force Survey is designed to counter falling response rates.

The ONS said it was attracting more respondents but showed a bias towards older people who were more likely to complete the online survey. Partial responses were another problem, it added.

The ONS said it would report back in early 2025 on progress.

The survey is the source of employment, unemployment and inactivity data. Its problems have made the job of measuring the labour market more complicated for the BoE.

Headline wage and vacancies data come from separate surveys of businesses.

Thursday’s ONS release showed some fresh signs of a cooling in the labour market with vacancies dipping by 30,000 in the April-to-June period, the 24th consecutive fall although they remained almost 12 per cent higher than before the COVID pandemic.

The unemployment rate - based on the LFS survey that is being phased out - held at 4.4 per cent.

British inflation defied forecasts for a slight fall and held at 2 per cent in June while strong underlying price pressures prompted investors to reduce bets that the Bank of England will cut interest rates in two weeks’ time for the first time since 2020.

Increases in hotel prices - in a month when US pop star Taylor Swift and other performers toured the UK - were partly to blame for the higher-than-expected inflation number, underscoring the BoE’s concern about services prices.

Britain’s once-towering headline inflation is lower than in the United States and the euro area after past jumps in food and energy prices fell out of the numbers.