UK wage growth slows amid interest rate cut hopes

UK wage growth slipped below 6% for the first time in almost two years, a sign that the labour market is cooling ahead of the Bank of England's (BoE) decision on whether to cut interest rates next month.

Annual pay growth, excluding bonuses, averaged 5.7 % between March and May, according to figures from the Office for National Statistics (ONS), down from 6% last month.

Including bonuses, annual wages also rose 5.7%. This was down from 5.9% previously and is in line with expectations.

Wage growth is at its lowest since the three months to August 2022, when it stood at 5.4%.

Private-sector wage growth — which is closely watched by the BoE for signs of a tight labour market — slowed to 5.6% from 5.9%.

Liz McKeown, director of economic statistics at the ONS, said: "We continue to see overall some signs of a cooling in the labour market, with the growth in the number of employees on the payroll weakening over the medium term and unemployment gradually increasing."

Read more:Interest rate cut in doubt even as UK inflation remains at Bank of England target

When the cost of living is taken into account, real pay grew by 3.2%, which was its fastest pace since the three months to August 2021.

Meanwhile, the rate of UK unemployment remains unchanged at 4.4% for the same period.

The labour market figures are the last major set of statistics before the BoE’s next interest rate decision in two weeks.

The BoE has pointed to wage growth as a risk to inflation, which would delay the timing of when it could begin cutting interest rates from their 16-year highs of 5.25%.

"The labour market is clearly cooling - with unemployment rising and vacancies falling - but pay growth still remains elevated at 5.7%, way in excess of the circa 3% level that is considered to be consistent with the 2% inflation target," Jake Finney, economist at PwC, said. "This still remains one of the largest potential barriers to an August rate cut."

Lindsay James, investment strategist at Quilter Investors, said the latest figures make it harder for Threadneedle Street to cut rates in August.

Read more: UK inflation unchanged at 2% in June

“Looking ahead to 1 August, it seems marginally less likely that the Bank of England’s first rate cut will materialise after inflation failed to cool any further, so September may be a more reasonable expectation for an initial easing of monetary policy.

"Nonetheless, inflation is still at target and the labour market is showing some signs of cooling, so we are likely to see more members of the monetary policy committee voting for a cut in the August meeting.”

Following higher-than-expected inflation yesterday, financial markets scaled back expectations of a rate cut at that meeting, putting the probability at 35%. This has just risen to 40% after the labour market data.

Michael Brown, senior research strategist at Pepperstone, added: “This morning’s UK labour market data further muddies the waters ahead of the August Bank of England decision in two weeks’ time, after yesterday’s hotter-than-expected inflation figures, with the labour market continuing to show some signs of slack, as earnings pressures ease somewhat, despite remaining incompatible with a return to the 2% inflation target.”

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