UK wage growth slowdown fuels Bank of England interest rate cut bets

UK wage growth continued to slow down in the three months to January in an encouraging sign for the Bank of England as it seeks to cut interest rates.

Average regular pay growth, excluding bonuses, fell to 6.1% in the quarter to January, down from 6.2% in the three months to December, the Office for National Statistics (ONS) said, marking the slowest growth for more than a year.

However, real pay growth, which takes inflation into account, increased for the seventh straight month to 2%.

Several Bank of England rate setters repeatedly said that they wanted to see wage growth ease before cutting interest rates to avoid an uptick in inflation.

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Paul Dales, chief UK economist at Capital Economics, said: “There are encouraging signs that a more marked slowdown is just around the corner and that an interest rate cut in June is possible”.

Thomas Pugh, economist at RSM UK, said the wage growth slowdown has “set the stage for a first rate cut in the summer and for interest rates to end the year at 4.5%”.

Julian Jessop of the Institute of Economic Affairs also believes that the data “will help reassure the Bank of England that it’s safe to start cutting interest rates.”

He says the UK is in a “Goldilocks scenario,” where the economy is running not too hot but not too cold either.

Markets are now pricing in three 0.25% cuts by policymakers by the end of the year, having forecast just short of three full cuts before the data came out.

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However, Rob Wood, of Pantheon Macroeconomics, said: “We don’t think the surprises are large enough to cause a major change in the Bank’s Monetary Policy Committee (MPC) guidance at their meeting next week, but the data will give the MPC a little extra confidence that they can cut rates in the summer.

“We expect the first Bank rate cut in June and today’s data reduce the risks of that cut being delayed until August a little.”

BoE interest rate-setter Catherine Mann, who has been calling for further increases in borrowing costs, said on Monday that there was still “a long way” to go for inflation pressures to be consistent with the central bank’s 2% target.

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The ONS also said the UK rate of unemployment lifted unexpectedly to 3.9% in the three months to January from 3.8% in the previous three months, while vacancies fell by 43,000 quarter on quarter in the three months to February to 908,000 — the 20th drop in a row.

Chancellor Jeremy Hunt insisted the government’s “plan is working”.

He said: “Even with inflation falling, real wages have risen for the seventh month in a row.

“Take-home pay is set for another boost thanks to our cuts to national insurance which, in total, are putting over £900 a year back into the average earner’s pocket.”

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