Falling wage growth could usher interest rate cuts, Andrew Bailey suggests
Bank of England Governor Andrew Bailey said there was more evidence that the labour market was “softening” and pay growth was declining, suggesting interest rate cuts may be warranted.
The Bank’s Monetary Policy Committee (MPC) voted 6-3 to hold interest rates at 4.25 per cent in the last meeting, with several policymakers raising concern about high wage growth in the lead-up to the decision.
But Bailey told a House of Lords committee on Tuesday that anecdotal evidence and statistical data showed firms were unlikely to raise pay for workers at the same rate as seen so far this year.
Figures published by the Office for National Statistics have shown wage growth above five per cent for the last seven months, with a gradual decline coming in recent months.
“My own view is that I think we are starting to see softening of the labour market,” Bailey said.
“That’s a message I get when I go around the country. Pay increases are still well above a level consistent with the target. However, I get the message pretty consistently they are coming off,” Bailey said.
Bailey said the changes were partly due to adjustments made by firms in response to Chancellor Reeves’ £20bn tax hikes to employers’ national insurance contributions (NICs).
The Governor also indicated he may be less influenced by President Trump’s flip-flopping over trade policy and other global developments given oil prices jumped up and down in line with developments in the conflict between Israel and Iran.
He said the Bank was as worried about the “unpredictability” of global events as the uncertainty brought by them.
Bailey added that all eyes would be on the end of the 90-day reprieve from “baseline” 10 per cent tariffs Trump offered trading partners in April and what effects they would have on price growth in the UK, thereby impacting interest rates decisions in the coming months.
“Because of the sheer unpredictability, it’s not that I’m ignoring the world, but I’m not putting that higher weight on it, because, frankly, it is so unpredictable at the moment that, as we saw in the last 24 hours, it can easily change overnight.
“We seem to be in a different world here, where these sort of hostilities break out, but they’re rather sort of controlled.”
Ramsden justifies interest rate cut vote
In a separate speech delivered at the Barclays-CEPR monetary policy forum, deputy governor Dave Ramsden said he voted for a rate cut at the last meeting due to a fall in employment and vacancies.
Ramsden said the drop in demand and shock to supply levels could see price growth ease at a faster pace than expected.
“While I still think the risks to inflation continue to be two-sided, I’m now attaching more weight to the downside risks in the medium term,” Ramsden said.
“I assessed that the signals from the labour market provided a sufficiently strong case for a reduction in Bank Rate to 4 per cent, to guard against the increasing risk that, in the medium term, inflation would settle at below our 2 per cent target.
The deputy governor said his vote in June, which comes straight off the back of a 25 basis point cut in May, was still aligned to the Bank’s overall policy approach to interest rates.
“I see no inconsistency with my latest vote and the MPC’s gradual and careful approach to the withdrawal of restrictiveness.”
Ramsden also pointed out that data provided by the official labour force survey had been less reliable due to problems faced by the Office for National Statistics (ONS) but a series of business surveys pointed to weakness in the jobs market.
Mixed signals?
Earlier on Tuesday, external MPC member Megan Greene said that concerns inflation will remain above three per cent over the coming months leave policymakers in an “uncomfortable place” – telling an event she worries “about the near-term profile for inflation this year, which in my view now resembles more of a plateau than a hump.”
She added: “We expect inflation to resume its fall towards our target from early next year. However, there is a risk that elevated inflation of roughly 3.5 per cent for the rest of this year will feed through into inflation expectations, and therefore wage and price setting behaviour.”