Blow to Bank of England rate cut hopes but boost for...

A continued acceleration in wage growth and surprise strength in the labour market revealed today has further complicated the Bank of England’s path for interest rate cuts. The BoE has been expected to ‘gradually’ reduce base rate close to 3.75 per cent by December, indicating three further cuts of 25 basis points each, as economic output stutters and inflation pressures fade. But average wage growth before bonuses was 5.9 per cent in the final three months of 2024, well above the bank’s 2 per cent inflation target, the Office for National Statistics said on Tuesday.

Image Credit: Mail Online [Wage growth has accelerated over recent years as employees have demanded higher pay to close the gap on rampant inflation. However, the BoE has repeatedly warned that wage hikes themselves represent strong inflationary pressure.]

Wage pressure, which was driven by 6.2 per cent growth in the private sector and 4.7 per cent in the public sector, could put the brakes on the BoE’s cuts. It follows fresh forecasts for consumer price inflation, which the bank said last week it expects to hit 3.5 per cent by June. Wage growth has accelerated over recent years as employees have demanded higher pay to close the gap on rampant inflation. However, the BoE has repeatedly warned that wage hikes themselves represent strong inflationary pressure.

Image Credit: Mail Online [The BoE was recently forced to reassess inflationary pressures and not predicts higher inflation than initially expected]

The Bank of England is forecast to cut base rate three more time in 2025. Thomas Pugh, economist at RSM UK, said: ‘These pay growth numbers will make the MPC nervous. 'Admittedly, we expect pay growth to come down this year as soft hiring feeds through into less wage pressure. But strong pay growth will keep the MPC on a ‘gradual and careful’ rate cutting path.’. But Pugh added that real wage growth of 2.5 per cent, the fastest rate since 2021, ‘should eventually feed through into stronger household consumption’ and help to revitalise lacklustre growth.

Separate ONS data showed the employment rate rose to 74.9 per cent in the fourth quarter as Britain’s frustratingly high rate of economic inactivity – those out of work but not seeking employment, such as students or those with long term sickness – eased slightly to 21.5 per cent. The unemployment rate rose to 4.4 per cent, though this was lower than market expectations of 4.5 per cent. The employment figures will provide some relief amid growing evidence that measures announced in the Autumn Budget have rattled the jobs market.

But vacancies also declined for the 31st consecutive quarter, falling 9,000 over the three months to 819,000, according to the ONS. Richard Carter, head of fixed interest research at Quilter Cheviot, said: ‘The upcoming changes to employer National Insurance contributions are also expected to weigh on hiring decisions, and today’s data suggests businesses may already be adjusting their workforce strategies to manage higher costs.

The BoE was recently forced to reassess inflationary pressures and not predicts higher inflation than initially expected. ‘If economic conditions continue to deteriorate, we could see wage growth moderate more sharply, but at the cost of rising job losses.’. Developed markets economist at ING James Smith added: ‘With the jobs market weakening, if not in complete freefall, pay growth should slow gradually this year per cent.

‘The BoE’s Decision-Maker Panel survey points to wage growth falling below 4 per cent over coming months. We don’t think we’ll see that in the official numbers this year, but we suspect we’ll end the year somewhere around the 4.5 per cent area. ‘If we’re right – both about that and a more material fall in services inflation through the spring – then this should give the Bank more confidence to keep cutting rates. We think the path of least resistance is for four rate cuts in total this year, or once per quarter.’.