The Governor of the Bank of England, Andrew Bailey, recently downplayed the significance of the latest UK pay growth data during a discussion with the German think tank Bruegel. He stated that the rise in pay was not as substantial as the central bank had projected.
Bailey emphasized the Bank of England’s extensive analysis of pay trends in its monetary policy report, reiterating their expectation for pay growth to normalize over time. While acknowledging an increase, he highlighted that it fell short of their forecasts.
When questioned about potential interest rate adjustments, the Governor maintained the bank’s consistent stance of a “gradual and careful” approach. He refrained from offering specific guidance on future policy decisions, emphasizing the bank’s practice of evaluating the situation on a meeting-by-meeting basis.
This statement follows the Bank of England’s recent decision to reduce interest rates by 0.25% to 4.5%, a move that divided the nine-member monetary policy committee. Two members advocated for a more aggressive 0.5% cut, while the majority favored a more cautious approach.
Bailey’s comments came in the wake of new data released by the Office for National Statistics (ONS), revealing a further increase in UK pay growth during the final quarter of the previous year. This fueled concerns about persistent inflationary pressures.
According to the ONS, average weekly earnings in the UK rose by 5.9% year-on-year in the three months leading up to December, exceeding the 5.6% increase observed in the preceding quarter. Wage growth continued to outpace inflation, which, despite an unexpected decline in December, remained above the target rate at 2.5%.
Furthermore, annual average earnings, adjusted for inflation, showed a 2.5% increase compared to the previous year, representing the most rapid growth since the summer of 2021. This development has prompted market observers to question its potential impact on the Bank of England’s trajectory for interest rate cuts.
Monica George Michail, Associate Economist at the National Institute of Economic and Social Research, anticipates a moderate slowdown in wage growth due to declining vacancies and rising unemployment. However, she projects that wage growth will remain elevated at 5.2% in the first quarter of 2025. Michail suggests that persistently strong wage growth has posed a challenge for the Bank of England and will likely continue to do so in the coming months, potentially leading to a more cautious approach to interest rate reductions.
Government policies, such as the national insurance increase implemented in Chancellor Rachel Reeves’ first budget, could also influence wage growth. Richard Carter, Head of Fixed Interest Research at Quilter Cheviot, notes that anticipated changes to employer national insurance contributions may impact hiring decisions. He suggests that recent data indicates businesses might already be adapting their workforce strategies to address higher costs. Carter highlights the possibility of more significant wage growth moderation if economic conditions worsen, but warns that this could come at the expense of increased job losses.
The latest figures on pay growth follow the recent GDP release, which indicated a modest 0.1% growth in the UK economy in December 2024, reinforcing concerns about economic stagnation.
As more data emerges regarding the health of the UK economy, financial markets have adjusted their expectations, reducing the likelihood of a further rate cut at the central bank’s next meeting. Danni Hewson, Head of Financial Analysis at AJ Bell, observes that the probability of a quarter-percentage-point rate cut in March has diminished to less than 23%. She emphasizes the importance of understanding the drivers behind the anticipated rise in inflation in January, particularly distinguishing between factors like energy prices and the resilience of the services sector.
Hewson acknowledges the limitations of the current jobs figures due to concerns about response size, making it challenging to obtain a comprehensive understanding of the current economic situation. However, she suggests that the prevailing belief is that the current state is temporary, and the ultimate outcome by summer will be more critical.
