British wage growth remains robust, dampening hopes for a rate cut

Wage growth in Britain has remained strong in the three months to April, keeping pressure on inflation and delaying hopes for a rate cut.

Official figures from the Office for National Statistics (ONS) show that nominal weekly earnings, excluding bonuses, rose 6% from February to April, consistent with the previous period and slightly below the forecast of 6.1%. Weekly profits including bonuses remained stable at 5.9%, above the 5.7% expected by economists.

The robust wage growth follows the 10% increase in the national living wage for workers over 21 to £11.44 from 1 April. This is the first time in almost a year that the overall profit figure has not fallen.

The unemployment rate for the same period rose from 4.3% to 4.4%, the highest since September 2021 and above forecasts of no change. This estimate is provisional due to the lower response rate to the ONS staff survey.

Strong wage growth figures are likely to delay Britain’s first rate cut since 2020, with financial markets now anticipating a cut from 5.25% to 5% in September. Investors expect only two or three rate cuts this year, compared to the seven expected in early 2024.

The Bank of England’s Monetary Policy Committee (MPC) will make its final decision next Thursday, the last before the July 4 general election. Interest rates are widely expected to remain unchanged for the tenth month in a row. Rob Wood, chief Britain economist at Pantheon Macroeconomics, noted that a rate cut with wage growth approaching 6% would be unusual. This suggests that the MPC could wait until September to cut rates.

Despite the robust earnings data, other labor market indicators are showing signs of slowing. The number of vacancies fell by 12,000 to 904,000, a continuation of almost two years of decline. The overall employment rate fell to 74.3%, the lowest level in three years, and monthly wage growth fell in April and May. The economic inactivity rate rose to 22.3%, the highest level since 2015, increasing pressure to keep people in work. The number of benefit recipients increased by 50,400 between March and April, the largest monthly increase since the pandemic.

Economists at Capital Economics predict the MPC will vote for a rate cut in August, provided other indicators such as wage settlements and next week’s inflation data show progress. Forecasters expect headline consumer price inflation to fall from 2.3% to 2% in May, meeting the Bank’s target for the first time since 2021. However, inflation is expected to rise above 2% for most of the year after May.

Separate surveys, including by the Bank’s decision-making panel, show that companies are cutting their wage cost forecasts for the coming year to around 4%. Economists believe that earnings growth must fall to 2-3% for inflation to fall and remain at the Bank’s target of 2%.

The Resolution Foundation, a think tank, stressed that the next government will have to tackle a slowing labor market and falling employment rather than high price growth. Chief economist Nye Cominetti noted that after 16 years of wage stagnation, average earnings are still more than £14,000 a year below pre-financial crisis levels.