Strong wage growth in the UK jeopardises interest rate cuts

According to official figures, wages in the UK have risen faster than expected, complicating the prospect of a rate cut by the Bank of England (BoE) in June.

According to figures from the Office for National Statistics (ONS), annual wage growth excluding bonuses averaged 6 percent between January and March, unchanged from the previous month.

Including bonuses, wage growth was 5.7%, unchanged from the previous month.

Economists had expected a decline in both figures. The BoE is watching for signs that Britain’s still strong wage growth could fuel high inflation again.

Real wages rose to 2.4% after adjusting for inflation, the highest since the three months to August 2021.

The Bank of England last week voted to keep interest rates unchanged, but indicated that progress on key data, including wage growth, could pave the way for rate cuts in June.

“A change in the key interest rate in June is neither ruled out nor a fait accompli,” said bank chief Andrew Bailey after the decision last week.

Private sector regular wages – a key indicator for the BoE – fell slightly from 6.0% to 5.9% in the three months to February.

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“Cash wage growth remains strong, with recent declines in the rate now levelling off, while real wage growth remains at its highest level for well over two years as inflation falls,” said Liz McKeown, director of economic statistics at the ONS.

Economists warn that the Bank of England is more likely to cut interest rates in June following the latest employment figures.

Ashley Webb, economist at Capital Economics, said: “While the further moderation in regular private sector wage growth in March suggests that wage pressures have eased somewhat faster than the Bank of England expected, broader indicators of wage growth are probably still a little too strong for the Bank’s liking.”

“This could ultimately make the bank a little more nervous when it comes to cutting interest rates for the first time in June.”

Unemployment, meanwhile, rose to 4.3%, compared to the previous estimate of 4.2%. Another 166,000 people became unemployed during the quarter, bringing the total number of unemployed and jobseekers to 1.486 million.

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The number of vacant properties also fell by 26,000 to 898,000 in the three months to April.

“We continue to see early signs that the labor market is cooling. Both the employment numbers from our household survey and the number of people employed have declined in recent periods,” McKeown said.

“At the same time, the steady decline in the number of job vacancies has continued for the twenty-second month in a row, even though the figures are still above pre-pandemic levels.

“As unemployment also increases, the number of unemployed per job vacancy has continued to rise and is approaching pre-COVID-19 levels,” she added.

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As real wages hit their highest levels in more than two years, Chancellor of the Exchequer Jeremy Hunt said: “This is the tenth month in a row that wages have risen faster than inflation, which will help to ease cost of living pressures on families.”

“While we face some challenges in our labour supply, including the impact of the pandemic, with the implementation of our reforms in childcare, pension tax reform and welfare, I am confident that we will increase the number of people in employment.”

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