Yahoo Finance UK wage growth slowdown hints at possible BoE interest rate cut
UK wage growth slowed in the three months to November, supporting the case for the Bank of England (BoE) to start cutting interest rates in the coming months.
Pay growth, excluding bonuses, fell sharply from 7.3% to 6.6% in the three months to November, according to figures from the Office for National Statistics (ONS). When bonuses were factored in, pay grew 6.5%.
Pay packets still grew faster than inflation, which stood at 3.9%, a two-year low.
Read more: No hint on interest rate cuts as Bailey says BoE committed to inflation target
Interest rate setters at the BoE will look closely at the new data, after worries that pay was rising too fast for inflation to fall to its 2% target.
Ben Broadbent, deputy governor of the BoE, said last month that “it will probably require a more protracted and clearer decline” in wage rises “before the Monetary Policy Committee can safely conclude that things are on a firmly downward trend”.
Threadneedle Street has raised interest rates in a bid to tackle inflation, holding them at a 15-year high of 5.25% in recent months.
Investors have moved to fully price in an interest rate cut by May 2024 and now see a nearly 50% chance of a cut by March.
Jake Finney, economist at PwC UK, said: “Financial markets are currently expecting over 100 basis points of cuts to the Bank of England base rate over the course of 2024.
“Signs that the labour market is gradually normalising will reinforce the view that rate cuts could come as early as May.”
Ashley Webb, UK economist at Capital Economics, expects a rate cut to take place in June.
He said: “Overall, the second bigger-than-expected fall in wage growth in as many months lends some support to our view that interest rates will be cut from 5.25% to 5% in June.”
However, some analysts believe the data isn't strong enough to push the Bank of England to cut interest rates in the first half of 2024.
"Today’s data, on the whole, support our view that the Bank of England can wait a bit longer versus market expectations before beginning its cutting cycle," analysts at Nomura Bank said.
"Markets are almost fully priced for May as the first cut versus our view that the Bank will want to hold on a bit longer and begin to cut only in August, taking more time to enable the MPC to be certain that pent-up inflationary pressures are all out of the pipes," they added.
Read more: UK economy returns to growth but spectre of recession still looms
UK chancellor Jeremy Hunt said it was “heartening” that this meant wages had now risen faster than prices for five consecutive months.
Hunt said: "It has been tough for many families recently, but with inflation now falling and the economy gradually returning to growth today's continuing rise in real wages will offer further relief.
"On top of this the cut in national insurance contributions will get more people back into the jobs market, not just supporting economic growth but saving a typical two earner household around £1,000 this year."
Meanwhile, the number of job vacancies fell by 49,000 over the three months to December to 934,000, marking the eighteenth period in a row that openings have fallen and the longest run of falls ever recorded.
The latest figures showed that the unemployment rate was largely unchanged at 4.2%.
The ONS will reveal the latest on UK inflation for December 2023 on Wednesday.
Watch: Wage growth slows as latest unemployment figures released
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