UK Posts Strong Wage Growth Ahead of BOE Rate Decision

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UK Posts Strong Wage Growth Ahead of BOE Rate Decision

general :: 15hrs ago :: source - bloomebrg

By Tom Rees, Irina Anghel and Philip Aldrick

(Bloomberg) -- UK wage growth held at its highest level in nine months and employment rose, evidence of resilient demand for workers that will likely keep the Bank of England cautious over further rate cuts.

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Average pay excluding bonuses rose 5.9% in the three months through January, the Office for National Statistics said Thursday. It was in line with economists’ expectations. Private-sector pay growth, the gauge being watched closely by the BOE, eased modestly to 6.1% from 6.2%.

There was little sign of big job losses following a hike in employment costs in Labour’s autumn budget. Tax data showed the number of payrolled employees rose 21,000 in February, defying expectations for a fall of the same size. The measure is flat since October when Labour announced a £26 billion ($33.7 billion) rise in payroll taxes and another hefty increase in the minimum wage.

Coming just hours before the latest BOE decision on Thursday, the figures are likely to entrench caution over lowering interest rates from restrictive territory too quickly. The Monetary Policy Committee was given an early look of the data before its meeting.

Some rate-setters are concerned over a recent quickening in pay growth with surveys suggesting that firms plan to press ahead with more large wage hikes in 2025.

Vacancies were up 1,000 compared with the previous three-month period, the first rise since the second quarter of 2022, while unemployment held at 4.4%.

“The latest figures show that the jobs market is not collapsing as some surveys suggest,” said Ruth Gregory, deputy chief UK economist at Capital Economics. “With wage growth still sticky, that will increase the Bank’s concerns about a resurgence in inflation and keep it on its ‘gradual and careful’ interest rate cutting path.”

The pound slightly extended losses after the data showed wages growth and the unemployment rate matched expectations, falling as much as 0.3% to $1.2970 as traders removed the risk of an upside surprise. Money markets maintained wagers on two more quarter-point reductions this year but boosted bets on a third cut to around 15% from 5%.

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“The big picture is labor demand has cooled materially over the past year, with payroll employment failing to grow since the summer, but there are now tentative signs it could be stabilizing.”

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The UK central bank is widely expected to keep rates on hold when the latest decision is announced at 12 p.m. in London. Officials are contending with a volatile global political backdrop as well as stubborn domestic price pressures, including from the labor market.

Surveys have pointed to businesses reducing headcount after Labour’s budget and opposition politicians have warned over the ability of the labor market to absorb more workers. However, there has been little sign of a major increase in redundancies or slowdown in hiring in official data. Vacancies are at the historically high levels seen just before Covid, while the redundancy rate edged up to 4.2 per 1,000 employees, the highest in a year but roughly in line with pre-pandemic levels.

Still, the Institute of Directors said that the figures “reflect weak business hiring intentions as a result of the government’s employment reforms.”

“Our data shows that half of business leaders facing higher National Insurance bills plan to reduce employment in response,” said Alex Hall-Chen, the IoD’s principal policy adviser.

The ONS said the number of people out of the labor market due to long term sickness was largely unchanged at 2.8 million, close to recent record highs and roughly where it has been for the past year. The government this week announced a series of welfare reforms in an attempt to bring more people with health conditions back into employment and save £5 billion.

The fate of the jobs market is seen as crucial to the BOE, as it decides whether to stick to a gradual reduction in rates. It is trying to judge whether firms will react to higher costs by taking a hit to their profits or passing them on through weaker employment, lower wage growth or higher prices. A looser labor market coupled with the tepid economic backdrop may provide the rate-setters enough confidence to press ahead with more rate cuts over the spring and summer.

--With assistance from Mark Evans and Joel Rinneby.

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