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UK Wage Growth Set to Accelerate, Complicating Path to Rate Cut - BLOOMBERG

JUNE 10, 2024

BY  Tom ReesBloomberg News

, Office for National Statistics

(Bloomberg) -- UK wage growth may accelerate for the first time in nine months, an uncomfortable pick-up for the Bank of England at a time it’s looking for inflationary pressures to moderate before it cuts interest rates.

Economists expect official data on Tuesday will show regular pay increases accelerating to 6.1% in the three months to April, according to a Bloomberg survey as of Friday afternoon. The data covers the crucial month of April when the minimum wage jumped by almost 10%.

Renewed gains in the pace of pay increases would add to concerns that a tight labor market is continuing to fuel inflation. That would make it more difficult for the BOE to ease the highest interest rates in 16 years.

The labor market report is one of the two remaining data releases that will have the biggest influence on the BOE’s next rate decision on June 20. While markets and economists have ruled out a cut this month, investors are looking for signs of when the bank might act and about the depth of concern about the wage figures.

The European Central Bank last week reduced borrowing costs for the first time in five years despite lingering inflationary forces. British policymakers led by BOE Governor Andrew Bailey have said the time is nearing when rates won’t need to remain so restrictive.

“The upcoming batch of labor market data will be an uncomfortable one for the Bank of England, though we don’t think it will derail its plans to cut rates soon,” said Ana Andrade, economist at Bloomberg Economics. “The underlying trend in wage growth is down and better news is likely over the coming months.”

Labor market data will also play into the political debate ahead of the July 4 general election. Prime Minister Rishi Sunak is hoping for some economic “feel-good factor” to cheer voters whose finances have been battered by high inflation. The figures will show wages outpacing inflation but remaining below their peak in real terms.

For the BOE, more signs of stubbornly high wage growth may further entrench market bets for a later start to its cutting cycle even though unemployment has ticked up in recent months. 

The snap election announcement along with higher-than-expected underlying inflation, particularly in services, ended hopes of a pre-election reduction in borrowing costs, though Sunak still claims cuts are on the way. Investors are only fully pricing in the first cut at November’s meeting after slashing the odds of a move in June or August.

BOE rate-setters have canceled all speeches and public appearances during the election campaign. It means investors have not recently heard from policymakers on how they are interpreting crucial inflation and labor market data in the run-up to the next meeting. 

Wage growth has remained stubbornly high despite growing signs in unemployment and vacancies data that the labor market is loosening. Economists expect unemployment to remain at a historically low level of 4.3%.

BOE rate-setters are wary of over-interpreting the jobs market data after the Office for National Statistics temporarily pulled its Labour Force Survey following a plunge in responses. They are watching private sector wages, services inflation and indicators on the tightness of the jobs market particularly carefully.

Economists said that the impact of an almost 10% jump in the National Living Wage for low earners and public sector pay deals likely kept overall wage pressures high in April. There have been concerns that the hike in the minimum wage will lead to a ripple effect that pushes up pay further up the income scale.

“Over the spring, early summer, what you should get is a pretty helpful base effect pushing the pay growth numbers down, but you’ve got less of that happening in April because of the effects of the NLW hike,” said Philip Shaw, chief economist at Investec. He predicted regular pay growth at 6.1%.  

“At that level, you would need to see quite a rapid deceleration in the average weekly earnings numbers for wage growth to be on the May Monetary Policy Report glide path downwards,” Shaw said. 

It came as the latest jobs report from KPMG and the Recruitment & Employment Confederation showed salaries for permanent workers increasing “markedly” in May even as hiring continued to ease.

It said that the fall in permanent hires was the smallest in 14 months and vacancies were only down slightly. However, REC said staff availability rose by the most since December 2020 as unemployment picks up.

“Pay growth remains steady, reflecting both settlements made by employers for their staff, but also the substantial national minimum wage rise in April,” said Neil Carberry, REC chief executive. “The jobs market looks like it’s on its way back, with clear improvements over last month on most key measures.”


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