Why a Bank of England rate cut just got less likely

Pay growth across the UK stayed comfortably ahead of inflation in the three months to June, weakening the case for the Bank of England to cut interest rates.

Regular earnings excluding bonuses grew 3.5% in the year to April to June, according to Office for National Statistics figures published on Tuesday (18 March).

Total earnings including bonuses grew 4.1% over the same period. Public sector regular pay rose 6.1% against 2.8% in the private sector, a gap the ONS attributes in part to variations in the timing of this year’s pay awards. Adjusted for inflation using CPI, regular pay grew 0.7% and total pay 1.3%.

Unemployment holds

The unemployment rate held at 4.9% for people aged 16 and over, down 0.1 percentage points on the quarter and up 0.2 points on the year.

The employment rate for 16 to 64-year-olds stood at 75.1%, and the economic inactivity rate at 20.9%, largely unchanged on both the quarter and the year.

Payrolled employee numbers fell by 78,000 over the year to June but dropped just 13,000 between May and June.

An early estimate for July shows a further fall of 13,000 on the month to 30.3 million, which the ONS treats as provisional.

Vacancies fell by 6,000 to 707,000 in the three months to July and have moved little since the start of the year.

Outside the pandemic, the last time the figure sat at or below that level was September to November 2014.

The ONS said feedback from its Vacancy Survey points to some small firms holding off on recruitment because of higher labour costs and other operating expenses.

Rate cuts now less likely

“The UK employment market appears to be nearing something of a trough,” said Richard Carter, Head of Fixed Interest Research at Quilter Cheviot.

“Private jobs surveys have indicated that the labour market has bottomed out, and with a new administration now in charge and the narrative appearing a lot more positive and hopeful, we may see businesses begin to get the confidence to start hiring once again.”

Carter said the prospect of a near-term cut has receded. “The chances of a rate cut from the Bank of England soon have faded into the horizon, and data such as this will likely confirm that the next move is still likely to be up,” he added.

The Resolution Foundation expects inflation to rise above 3% in the second half of the year, driven largely by events in the Middle East, which raises the risk of real wage falls for workers and gives the Bank less room to loosen policy.

Private sector regular pay in real terms is already lower than it was last October, according to the think tank’s analysis.

“Britain’s early summer of decent economic growth hasn’t translated into more jobs and stronger pay,” said Louise Murphy, Senior Economist at the Resolution Foundation. “Unemployment continues to hover around five per cent, while wages in the private sector are barely keeping pace with price rises.”

Bank Rate feeds directly into tracker and standard variable rate mortgages, while fixed-rate pricing follows market expectations for where rates head next. Households coming off fixed deals face those expectations rather than the rate itself.

Now read: UK take-home pay is falling for the first time in more than three years