UK wage growth cools, sparking debate within the Bank of England. Will a slowdown be enough to tame inflation and avoid interest rate hikes? Households brace for a potential decline in living standards.
Britain’s wage growth dipped in late 2023, marking the slowest pace in over a year. But will this cool-down be enough to convince the Bank of England (BoE) to loosen its grip on interest rates? The answer, for now, seems to be a cautious wait-and-see.
The news sent the pound sterling on an upward trajectory against the dollar and euro. Investors, ever the anticipatory bunch, slightly adjusted their forecasts, dialing back expectations for aggressive rate cuts from the BoE this year. Excluding bonuses, wages clocked in at a 6.2% increase in the final quarter of 2023 compared to the same period the year before. While exceeding analyst predictions, this represents a slowdown from the previous quarter and the weakest growth since late 2022.
However, the BoE is likely to remain cautious despite the moderation in wages. The specter of a mild recession looms over the latter half of 2023, with confirmation potentially arriving later this week. Businesses continue to grapple with a tight labor market, struggling to fill vacancies and retain staff. This persistent tightness, coupled with high employee illness rates, keeps the pressure on employers.
The slowdown extends beyond headline figures. When bonuses are factored in, pay growth dips even further, marking the smallest increase since mid-2022. Economists see this as a sign of a gradual cool-down in the labor market, with job openings falling for the 19th consecutive quarter.
“The key question for the BoE remains – has the labor market cooled enough to bring inflation back down to its 2% target?” ponders a leading economic analyst.
The BoE’s primary concern is that wage growth might continue to outpace efforts to control inflation. Inflation data due on Wednesday is expected to show a slight uptick, before hopefully retreating to the target by the second quarter, only to potentially rise again later in the year.
This mixed bag of data from the labor market likely explains the recent split decisions within the BoE’s Monetary Policy Committee (MPC). In February, some members voted for a rate hike, some for a cut, while the majority opted to hold.
“The data suggests the UK economy might not be in dire need of immediate monetary intervention,” suggests an economist at a global bank, who anticipates the first rate cut to come in August. As of Tuesday, markets were pricing in a reduced chance of a BoE rate hike in June, but still fully expect a cut by August.
While wages are slowing, there were some bright spots for workers. The unemployment rate dipped between October and December, and employment figures showed a positive rise. Additionally, after adjusting for inflation, workers saw their biggest increase in regular earnings since late 2021.
However, the outlook for British households remains concerning. They are on track to experience the steepest decline in living standards since World War Two, posing a significant challenge for Prime Minister Rishi Sunak, who is expected to call a national election later this year.
