UK interest rates could be cut again as wage growth slows

UK wage growth continued to slow in the three months to July, according to official data, adding to hopes that the Bank of England will announce more interest rate cuts this year.

Average earnings excluding bonuses slowed to 5.1% in the three months to July, Office for National Statistics (ONS) data showed.

Annual pay growth including bonuses slowed to 4%, in part due to one-off payment to NHS staff in June 2023 that was not repeated this year, down from 4.5% in the three months to June.

The Bank of England keeps a close eye on wage growth, because of its significant impact on inflation, which is currently above the 2% target.

Monica George Michail, associate economist for the National Institute of Economic and Social Research, highlighted that services sector pay fell faster than expected to 3.8% compared to an average of 5.9% in the first five months of this year.

"This is positive news for inflation and might provide the Bank of England with increased confidence regarding interest rate cuts," she said.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said that easing wage growth would "cement expectations that the Bank of England will deliver two interest rate cuts by the end of the year."

Markets have priced in the likelihood that the Bank will keep rates on hold this month at around 72%, but those bets had reduced since Monday, according to Streeter.

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Streeter added: "Cuts are looking more likely to be voted for at the meetings in November and December. A lot is likely to be riding on August’s CPI number, due out just a day before the monetary policy committee (MPC) meets."

Richard Carter, head of fixed interest research at Quilter Cheviot, said that markets had been pricing in a "relatively slow pace of cuts" given persistent wage growth and while this rate was coming down, it still remained "significantly higher" than the Bank’s 2% inflation target.

The Bank of England's MPC is due to meet on Thursday 19 September, when it will announce its next interest rate decision. The central bank cut its base rate in August from 5.25% to 5%, which marked the first interest rate cut since March 2020.

Peter Arnold, chief economist for EY UK, said: "Pay growth is gradually slowing from very high rates, while labour market conditions are looser than they were last year but still relatively tight by historical standards."

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He said that forecasting group the EY ITEM Club "sees no obvious reason why the MPC would deviate from the path of gradual rate cuts they implied last month, so the EY ITEM Club expects next week's meeting to result in a vote to keep Bank Rate at 5%.”

Meanwhile, the rate of unemployment fell to 4.1%, the ONS data showed, down from 4.2% in the three months to June.

There were an estimated 857,000 job vacancies in the UK in June to August. That's a 42,000 fall, or a 4.7% decrease, from the period March to May 2024.

The number of people classed as economically inactive fell to nearly 9.3 million in May to July, a rate of 21.9%. That represented a slight decline from 22.2% in last month's data release but was still higher than estimates a year ago.

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