Strong wage growth kills hopes of interest rate cut
Analysts have warned that strong wage growth data reported this morning has killed any chance that the Bank of England will cut interest rates later this week.
While the central bank had been widely expected to hold interest rates at its Monetary Policy Committee meeting on Thursday, the decision has been cemented by wages rising 5.2 per cent, in the three months to October, compared to expectations of 4.6 per cent.
“The latest UK jobs report provides yet more justification, if any were needed, for the Bank of England to keep rates on hold at its meeting this week,” said James Smith, economist at ING.
The surge in wage growth was “entirely down to the private sector,” explained Smith, as the sector saw regular pay increase 12 per cent on an annualised basis.
Interest rate decision
This figure is historically especially important to the central bank’s decision-making on interest rates, as private-sector pay trends tend to reflect the wider job market better than the public sector.
While these numbers can be volatile, and there is no clear explanation for the wage surge, it will still cause alarm to those at the Bank worried that inflation might be harder to get rid of than expected.
“They can also point to the Bank’s own ‘Decision Maker Panel’ survey of CFOs, which has shown wage growth expectations bottoming out around four per cent, despite wider signs that the jobs market is cooling,” added Smith.
Danni Hewson, AJ Bell head of financial analysis, attributed the spike in private sector wages to a potential hike in the national living wage in April, with business taking “forward action when their own pay reviews were implemented”.
“For workers, getting a bit more in their pockets will be welcome, but it has pushed the door even further closed on the slim chance that the Bank of England might deliver a surprise cut to interest rates later this week,” she said.
There is still one more piece of data that policymakers are waiting on: Services inflation data tomorrow.
Markets are now expecting between just two and three rate cuts over the next year, which would leave interest rates above four per cent in November 2025.
“Rate cut expectations have fallen rapidly over the course of 2024, as central bankers proved more cagey than investors had hoped, and inflation proved a tad stickier,” explained Michael Field, European market strategist at Morningstar.
“The Bank of England is now something of an anomaly among Western central banks, with rates still high at 4.75 per cent and having only cut rates on two occasions this year.”