Bank of England still on track to cut interest rates despite surging wages
Andrew Bailey said the Bank of England was likely still on track to cut interest rates again this year despite surging pay growth and an anticipated increase in inflation.
The Governor of the Bank of England said the latest labour market figures, which showed a big increase in wage growth, would likely not change the calculation for policymakers.
“Pay growth went up, but actually not quite as much as we were expecting,” he said at an event in Brussels.
According to the Office for National Statistics (ONS), regular pay growth in the private sector hit 6.2 per cent in the final quarter of the year, its highest level since November 2023.
But this was actually slightly below the 6.3 per cent anticipated by experts at the Bank of England.
Pointing to the Bank’s own forward-looking survey of pay pressures, Bailey suggested that wage pressures would ease in the coming year.
“One of the best anchors we have is the survey that our agents around the country do every year, and they think settlements this year are going to come down,” he said.
The Bank of England forecasts that annual wage growth will fall to 3.7 per cent across 2025, down from 5.3 per cent across this year as a whole.
“I don’t think we saw anything this morning that fundamentally changes that,” Bailey continued.
His comments come ahead of the latest inflation figures, which are due to be published tomorrow morning. City experts think the headline rate will climb to 2.8 per cent on the back of rebounding services prices.
Looking further into the year, the Bank’s forecasts suggest inflation will rise to 3.7 per cent later in the year, largely on the back of higher energy prices.
Bailey said higher inflation would not represent “a story about the fundamental state of the economy,” because it largely reflected changes in regulated prices, like energy bills.
He also added that the increase in inflation would be taking place against “a background…which is weaker in growth terms than we thought it would be” which would help limit its persistence.
The Bank of England cut interest rates for a third time earlier this month, bringing the Bank Rate down to 4.50 per cent. Markets anticipate two further cuts this year.