Pre-election interest rate cut unlikely as UK wages rise

The chances of an interest rate cut by the Bank of England (BoE) this summer have fallen as wages grew at a faster-than-expected pace.

Total pay, including bonuses, grew by 5.9% in the three months to April, according to the Office for National Statistics (ONS). This was higher than economists’ predictions of growth of 5.7%.

Real pay, which takes into account the impact of inflation, increased by 2.7% from February to April, the fastest rate since July to September 2021.

This was in part down to the government's 9.8% increase to the National Living Wage, which came into force in April. Excluding bonuses, basic pay rose by 6% in the three months to April.

Regular pay, which excludes bonuses, rose by 2.9%, the fastest growth since June to August.

While it is good news for workers, this leaves pay growth at more than double the 2.3% inflation rate. BoE officials have said wages must be under control and not a risk to inflation before they can begin cutting interest rates.

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NIESR associate economist, Monica George Michail, said that the “persistence of wage growth also raises concerns about stickier inflation, prompting the Bank of England to remain cautious about interest rate cuts.”

Victoria Scholar, head of investment at Interactive Investor, says, she also believes Threadneedle Street will not cut rates this summer.

"The central bank is unlikely to deliver its first cut to interest rates in August, with November currently the likeliest month for the start of the upcoming monetary loosening cycle. The Bank of England might also want to wait until the 4th July general election is out of the way so that it can avoid any accusations of supporting the government or a lack of independence," she said.

Matthew Ryan, head of market strategy at global financial services firm Ebury, said the latest UK jobs report had mixed implications for markets.

“Wage growth remained sticky and far too high for comfort in April at around 6%, well above the levels that would make the Bank of England have any real confidence in achieving its 2% inflation target, he commented.

“The rest of the data was, however, patently consistent with a cooling in labour market conditions. Unemployment is rising, albeit gradually, and is now at its highest level since September 2021."

Yael Selfin, chief economist at KPMG UK, believes the wage growth figures are “unlikely” to impact the BoE’s decision on interest rates.

“Overall, today’s data are unlikely to warrant an immediate shift in policy from the Bank of England. We expect the MPC to stay put at its June meeting and reassess the incoming data flow over the summer before it embarks on cutting interest rates,” she said.

Financial markets see just a 10% chance of a rate cut from 5.25% to 5% on 20 June before the ONS data was published. Most bets are on a September cut.

“There is a lot more data for the Bank of England to mull over between now and its June meeting, but a rate cut before the election is a long shot even if the odds are looking better for a late summer change," Danni Hewson, AJ Bell head of financial analysis, said.

Jake Finney, economist at PwC UK, added that the latest ONS data “presents a headache for the Bank of England.”

He said: “A broad set of indicators suggests that the labour market is cooling, but pay growth has not fallen to the extent they would like to see.”

The BoE announces its next interest rate decision on June 20.

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Meanwhile, the rate of UK unemployment rose to 4.4% in the three months to April, up from 4.3% in the previous three months.

The ONS said: "This month's figures continue to show signs that the labour market may be cooling, with the number of vacancies still falling and unemployment rising, though earnings growth remains relatively strong."

The number of people claiming out-of-work benefit payments from the Department for Work and Pensions (DWP) rose by 50,400 in May. Furthermore, vacancies plunged to 904,000 in the three months to May.

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