The recent slowdown in wage growth might pave the way for additional interest rate cuts by the Bank of England (BoE) this year. Although inflation persists, new data on wages could alleviate some concerns.
Wage Growth at a Two-Year Low
Wage growth has decelerated to its most sluggish pace in over two years. According to the Office for National Statistics (ONS), wages grew by 5.4% year on year over the three months leading up to June. This marks a decline from the 5.7% growth observed in the previous quarter.
The latest figures indicate the smallest wage increase since July 2022. Adjusted for inflation, the data suggests that UK workers experienced an average pay rise of 2.4%. This decline in wage growth signifies cooling conditions in the labour market, a development welcomed by the BoE.
Bank of England’s Perspective
Ruth Gregory, Deputy Chief UK Economist at Capital Economics, noted that easing wage growth supports forecasts for further interest rate cuts. She stated, ‘This lends some support to our forecast that the Bank of England will press ahead with two more 25bps interest-rate cuts later this year.’
Despite a drop in the unemployment rate to 4.2%, experts believe this won’t significantly influence the BoE’s immediate decisions. The BoE is expected to pause rate adjustments in September before resuming cuts in November and December.
Concerns Over Persistent Inflation
While slowing wage growth is seen as positive, inflation remains a concern. The National Institute of Economic and Social Research (NIESR) highlighted that strong wage growth could still contribute to sticky inflation.
Monica George Michail, an associate economist at NIESR, pointed out that even though inflation-adjusted wages rose by 1.6%, persistent wage pressures may prompt the BoE to reconsider potential rate cuts. She expects wage pressures to ease gradually as the labour market cools further, with unemployment likely to rise.
The BoE had increased interest rates to a 16-year high of 5.25% last year to combat soaring inflation. Earlier this month, it made a minor quarter-point cut, lowering rates to 5%. Governor Andrew Bailey remains cautious regarding future cuts.
Inflation Data Influence
Upcoming inflation data will be crucial in shaping the BoE’s decisions. Economists anticipate that inflation may have exceeded the BoE’s 2% target in July, driven by seasonal factors like increased prices for holiday-related expenses such as airfares and hotels.
Rob Wood, Chief UK Economist at Pantheon, highlighted that hotel prices have shown considerable strength. Factors such as new pricing patterns post-COVID and occasional demand surges have contributed to this trend. Even though some price inflation might be distorted, genuine price increases in travel-related services persist.
Decline in Vacancy Rates
The ONS data also reported a decline in vacancy rates, with the number of vacancies decreasing by 26,000 to 884,000 over the three months to June.
This decline in job vacancies, along with a high economic activity figure of 9.41 million, signals that there is still significant room for improvement in the labour market. This will likely impact the BoE’s policymaking process.
Chancellor Rachel Reeves acknowledged these challenges, emphasizing the need for policies that support employment and economic activity. She mentioned plans to address these in the upcoming Budget, focusing on spending, welfare, and tax decisions.
Future Rate Cuts
Despite the cooling wage growth, the strong inflation figures may complicate the BoE’s future rate decisions. Some economists predict that the BoE will continue to proceed cautiously, keeping rates unchanged in the near term.
The balance between controlling inflation and supporting economic growth remains delicate. The BoE’s approach will likely be influenced by a combination of wage growth, inflation data, and overall economic conditions.
In conclusion, the slowdown in wage growth provides the BoE with some leeway for potential interest rate cuts. However, stubborn inflation continues to pose a challenge. The coming months will be critical as the BoE navigates these complex economic dynamics, aiming to strike a balance between easing inflationary pressures and fostering economic growth.