UK wage growth slows, poses dilemma for Bank of England

In a development that adds to the uncertainty surrounding a potential interest rate cut by the Bank of England, wage growth in the UK has slowed but remains at levels that would typically be deemed too high to maintain the central bank’s 2% inflation target. Official data revealed that earnings, excluding bonuses, grew by 5.7% in the three months leading up to May compared to the same period last year.

Although this represents the slowest growth in core pay since the summer of 2022, when employers rushed to increase salaries in the face of a labor shortage, it still indicates a robust level of wage growth. The stability in sterling and British interest rates futures following the release of the data suggests that market reaction was muted.

Yael Selfin, Chief Economist at KPMG UK, commented on the figures, stating that the modest slowing in pay growth may be seen as positive for those anticipating an interest rate cut in August. However, with annual pay growth, excluding bonuses, at 5.7%, the Bank of England may be hesitant to risk a rate cut before the labor market cools down sufficiently.

The data also revealed that total earnings, including bonuses, grew by 5.7% during the same period, aligning with the median forecasts of economists in a Reuters poll. In the three months leading up to April, regular pay had risen by an annual 6.0%, and total earnings were up by 5.9%.

The Bank of England is scheduled to announce its next interest rate decision on August 1. Following the publication of stronger-than-expected inflation data earlier this week, investors have estimated a roughly one-in-three chance of an interest rate cut, which would be the first since 2020.

In addition to the wage growth data, the Office for National Statistics (ONS) announced that it would be postponing the transition to a new version of its Labour Force Survey, which was originally planned for September. The new survey aims to address declining response rates for the current survey. The ONS stated that while the Transformed Labour Force Survey (TLFS) has attracted more respondents, it has shown a bias towards older individuals who are more likely to complete the online survey. Partial responses have also posed challenges. The ONS will continue to use the current survey as the primary measure of the labor market while further developing the TLFS.

Furthermore, the data revealed signs of a cooling labor market, with job vacancies declining by 30,000 in the April-to-June period, marking the 24th consecutive quarterly fall. However, vacancies remained nearly 12% higher than pre-pandemic levels. The unemployment rate, based on the current survey, held steady at 4.4%.

Overall, these mixed economic indicators create a complex situation for the Bank of England as it weighs the possibility of an interest rate cut against wage growth that remains relatively high. The decision will have implications for inflation management and the overall health of the UK economy.