UK pay growth at two-year low keeps BOE on easing path

UK pay growth cooled to a two-year low in the three months through July, another step down in wage pressures that keep the Bank of England on track to cut interest rates again this year.

Average earnings excluding bonuses rose 5.1 per cent from a year earlier, the Office for National Statistics said on Tuesday (Sep 10). It was the smallest increase since the summer of 2022 and in line with the median forecast in a Bloomberg survey of economists.

The pay data also confirmed a £460 (S$786.81) boost to the state pension next year, another large increase that Prime Minister Keir Starmer hopes can soothe a backlash among Labour MPs over plans to cut winter fuel subsidies for pensioners.

While the BOE is unlikely to cut rates at next week’s meeting, the figures keep policymakers on course for a reduction later this year.

After reducing borrowing costs for the first time in over four years last month, governor Andrew Bailey and his colleagues have suggested they favour a cautious approach to further cuts. 

Wage growth is still higher than the BOE deems compatible to keeping inflation to the 2 per cent target. The latest data also showed unemployment fell to 4.1 per cent in the latest three months, a second consecutive drop, while the number of people in work grew a faster-than-forecast 265,000.

“Wage growth is moving lower, and therefore in the right direction for another interest rate cut, likely in November,” said Tomasz Wieladek, chief European economist at T Rowe Price. “With strong growth in activity and strong growth in employment, there is risk that wage growth eventually plateaus at a level that is not consistent with the inflation target.” 

Traders slightly reduced bets on rate reductions following the figures but are still expecting a quicker pace of cuts later in 2024. Markets are leaning towards successive moves in November and December after shifting their bets in recent weeks on concerns over the resilience of economic activity, particularly in the US. The figures had little impact on the pound, which traded 0.1 per cent up against the dollar at US$1.3090. 

The latest figures mean the state pension will rise by 4 per cent – the level of earnings growth including bonuses –  under a guarantee to raise the payment every year by the highest of wage growth, inflation or 2.5 per cent. Consumer prices are growing at just over 2 per cent. It will mean a £460 addition to the full pension in April.

Starmer is hoping the inflation-busting increase will calm concerns among his own MPs over cuts to winter fuel subsidies for the elderly. BLOOMBERG