UK Wage Growth Slows to Two-Year Low, Interest Rate Cuts Predicted

The UK National Statistics Office has released data showing that UK wage growth slowed to 5.1% in the three months ending July, the lowest level in two years. This trend may provide room for the Bank of England to further cut interest rates this year.

The data showed that average income after deducting bonuses increased 5.1% year-on-year, in line with economists’ forecasts. The slower growth rate means that the state pension will increase by 460 pounds next year, which will help ease opposition to plans to cut winter fuel subsidies for pensioners.

While wage growth remains above the level the Bank of England needs to maintain its 2% inflation target, the latest data showed that the unemployment rate fell for a second consecutive month to 4.1%, while the number of employed people increased faster than expected to 265,000.

Tomasz Wieladek, chief European economist at T. Rowe Price, said that with wage growth slowing, November might be the right time to cut rates again. “With strong growth in economic activity and employment, wage growth may eventually stagnate at levels inconsistent with the inflation target.”

Market expectations for rate cuts have tempered somewhat following the data, but a faster pace of cuts is still expected later in 2024. Markets have shifted expectations in recent weeks on concerns about the resilience of economic activity, particularly in the United States, and are now leaning toward back-to-back rate cuts in November and December.

Bloomberg economists Ana Andrade and Dan Hanson commented that the decline in annual regular wage growth in the private sector may strengthen the Bank of England’s confidence that inflation will reach 2% on a sustained basis. However, this is unlikely to prompt the central bank to change its monetary policy stance.

The latest data also shows that the state pension will rise by 4% (the level of income growth including bonuses), and the pension will be guaranteed to increase every year by the highest of wage growth, inflation or 2.5%. This means that the full pension will increase by £460 in April.

Labor market data also showed that the Bank of England’s private sector wage growth indicator fell to 4.9%, also the lowest level in two years. Wage increases outstripping inflation continue to support household finances. Real wages rose 3% year-on-year in the three months to July, slightly below expectations.

The number of job vacancies fell to 857,000 in the three months to August, with most industries reporting declines. The largest falls were in wholesale and retail trade, repair of motor vehicles and motorcycles, and human health and social work activities.

Economic inactivity fell in all age groups during the quarter, mainly due to fewer students, long-term sick people or retirees. However, these declines were partially offset by an increasing number of people dropping out of the labour force as people were reluctant to look for work.

Yael Selfin, chief UK economist at KPMG, said the data showed that “the labour market continues to lose momentum”.