(Original title: UK wage growth falls to a two-year low, economic experts predict two interest rate cuts before the end of the year)
Zhitong Finance APP learned that the latest data from the UK National Statistics Office showed that UK wage growth slowed to 5.1% in the three months ending July, the lowest level in two years. This trend may provide room for the Bank of England to further cut interest rates this year. Although the Bank of England is unlikely to cut interest rates at its meeting next week, the slowdown in wage growth provides a basis for policymakers to cut interest rates later this year. Last month, the Bank of England lowered borrowing costs for the first time in more than four years, and Bank of England Governor Andrew Bailey and his team said they tend to take a cautious approach to further cost cuts.
Figure 1
The data showed that average income after deducting bonuses increased 5.1% year-on-year, in line with Bloomberg economists’ forecasts. The slower growth rate means that the state pension will increase by 460 pounds (about 602.46 US dollars) next year, which is in line with the increase desired by British Prime Minister Keir Starmer and will help ease opposition from Labour MPs to plans to cut winter fuel subsidies for pensioners.
While wage growth remains above the level the Bank of England needs to maintain its 2% inflation target, the latest data showed that the unemployment rate fell for a second consecutive month to 4.1%, while the number of employed people increased faster than expected to 265,000.
Figure 2
Tomasz Wieladek, chief European economist at T. Rowe Price, said that with wage growth slowing, November might be the right time to cut rates again. “With strong growth in economic activity and employment, wage growth may eventually stagnate at levels inconsistent with the inflation target.”
Market expectations for rate cuts have tempered somewhat following the data, but a faster pace of cuts is still expected later in 2024. Markets have shifted expectations in recent weeks on concerns about the resilience of economic activity, particularly in the United States, and are now leaning toward back-to-back rate cuts in November and December. The data had limited impact on sterling, which rose 0.1% to $1.3090.
Bloomberg economists Ana Andrade and Dan Hanson commented that the decline in annual regular wage growth in the private sector may strengthen the Bank of England’s confidence that inflation will reach 2% on a sustained basis. However, this is unlikely to prompt the central bank to change its monetary policy stance. Wage growth is still too high, coupled with strong inflation in the underlying services sector and a fast-growing economy, the Bank of England may be cautious about cutting interest rates in the coming months. The next rate cut is expected to be in November, followed by quarterly rate cuts.
In addition, the latest data shows that the state pension will rise by 4% (the level of income growth including bonuses), and the pension will be guaranteed to increase every year by the highest of wage growth, inflation or 2.5%. This means that the full pension will increase by £460 in April.
Figure 3
Labor market data also showed that the Bank of England’s private sector wage growth indicator fell to 4.9%, also the lowest level in two years. Wage increases outstripping inflation continue to support household finances. Real wages rose 3% year-on-year in the three months to July, slightly below expectations.
Figure 4
The number of job vacancies fell to 857,000 in the three months to August, with most industries reporting declines. The largest falls were in wholesale and retail trade, repair of motor vehicles and motorcycles, and human health and social work activities.
Economic inactivity fell in all age groups during the quarter, mainly due to fewer students, long-term sick people or retirees. However, these declines were partially offset by an increasing number of people dropping out of the labour force as people were reluctant to look for work.
Yael Selfin, chief UK economist at KPMG, said the data showed that “the labour market continues to lose momentum”. “However, this is unlikely to prompt the MPC to ease monetary policy further at its upcoming meeting,” she added.
Table of Contents
UK Wage Growth Slows to Two-Year Low, Interest Rate Cuts Anticipated
The latest data from the UK National Statistics Office has revealed a significant slowdown in UK wage growth, dropping to 5.1% in the three months ending July 2024, the lowest level in two years [[2]]. This trend is expected to provide room for the Bank of England to further cut interest rates this year, with economic experts predicting two interest rate cuts before the end of the year.
According to the data, average income after deducting bonuses increased 5.1% year-on-year, in line with Bloomberg economists’ forecasts [[3]]. Although wage growth remains above the level the Bank of England needs to maintain its 2% inflation target, the slower growth rate means that the state pension will increase by 460 pounds (about 602.46 US dollars) next year, easing opposition from Labour MPs to plans to cut winter fuel subsidies for pensioners.
The labor market data also showed that the unemployment rate fell for a second consecutive month to 4.1%, while the number of employed people increased faster than expected to 265,000 [[3]]. Additionally, the Bank of England’s private sector wage growth indicator fell to 4.9%, also the lowest level in two years. Wage increases outstripping inflation continue to support household finances, with real wages rising 3% year-on-year in the three months to July, slightly below expectations.
Tomasz Wieladek, chief European economist at T. Rowe Price, believes that with wage growth slowing, November might be the right time to cut rates again. “With strong growth in economic activity and employment, wage growth may eventually stagnate at levels inconsistent with the inflation target” [[1]].
Market expectations for rate cuts have tempered somewhat following the data, but a faster pace of cuts is still expected later in 2024. Markets have shifted expectations in recent weeks on concerns about the resilience of economic activity, particularly in the United States, and are now leaning toward back-to-back rate cuts in November and December.
Bloomberg economists Ana Andrade and Dan Hanson commented that the decline in annual regular wage growth in the private sector may strengthen the Bank of England’s confidence that inflation will reach 2% on a sustained basis. However, this is unlikely to prompt the central bank to change its monetary policy stance. Wage growth is still too high, coupled with strong inflation in the underlying services sector and a fast-growing economy, the Bank of England may be cautious about cutting interest rates in the coming months.
the slowdown in UK wage growth has created room for the Bank of England to consider further interest rate cuts this year. With economic experts predicting two interest rate cuts before the end of the year, this could have significant implications for the UK economy and households.
References:
UK Wage Growth Slows, Interest Rate Cuts Expected
The latest data from the UK National Statistics Office has revealed that wage growth has slowed to 5.1% in the three months ending July, the lowest level in two years. This slowdown may provide room for the Bank of England to further cut interest rates this year.
The current Bank rate is 5.00%, having decreased by 0.25% from 5.25% in August 2024 [[2]]. The Bank of England Governor Andrew Bailey and his team have expressed a cautious approach to further cost cuts. Despite the slowdown in wage growth, the Bank of England is unlikely to cut interest rates at its meeting next week. However, the trend may provide a basis for policymakers to cut interest rates later this year.
The data showed that average income after deducting bonuses increased 5.1% year-on-year, in line with Bloomberg economists’ forecasts. This slower growth rate means that the state pension will increase by 460 pounds (about 602.46 US dollars) next year, which is in line with the increase desired by British Prime Minister Keir Starmer and will help ease opposition from Labour MPs to plans to cut winter fuel subsidies for pensioners.
While wage growth remains above the level the Bank of England needs to maintain its 2% inflation target, the latest data showed that the unemployment rate fell for a second consecutive month to 4.1%, while the number of employed people increased faster than expected to 265,000. Market expectations for rate cuts have tempered somewhat following the data, but a faster pace of cuts is still expected later in 2024.
Tomasz Wieladek, chief European economist at T. Rowe Price, believes that with wage growth slowing, November might be the right time to cut rates again. “With strong growth in economic activity and employment, wage growth may eventually stagnate at levels inconsistent with the inflation target.” Market expectations are now leaning toward back-to-back rate cuts in November and December.
Bloomberg economists Ana Andrade and Dan Hanson commented that the decline in annual regular wage growth in the private sector may strengthen the Bank of England’s confidence that inflation will reach 2% on a sustained basis. However, this is unlikely to prompt the central bank to change its monetary policy stance. Wage growth is still too high, coupled with strong inflation in the underlying services sector and a fast-growing economy, the Bank of England may be cautious about cutting interest rates in the coming months.
The latest data also shows that the state pension will rise by 4% (the level of income growth including bonuses), and the pension will be guaranteed to increase every year by the highest of wage growth, inflation or 2.5%. This means that the full pension will increase by £460 in April.
Labor market data also showed that the Bank of England’s private sector wage growth indicator fell to 4.9%, also the lowest level in two years. Wage increases outstripping inflation continue to support household finances. Real wages rose 3% year-on-year in July, supporting consumer spending.
the slowdown in UK wage growth may provide room for the Bank of England to further cut interest rates this year. While the Bank of England is unlikely to cut interest rates at its meeting next week, policymakers may consider cutting interest rates later this year. The next rate cut is expected to be in November, followed by quarterly rate cuts.
For those with mortgages, a decrease in interest rates can lead to lower mortgage payments and increased affordability. According to the Bank of England, a change in the base rate can affect the cost of borrowing on mortgages, credit cards, and loans [[3]]. As interest rates are expected to decrease, it may be a good time to consider reviewing mortgage options and taking advantage of potential savings.
References:
[1] BBC News. (2024). Mortgage rates: How do UK interest rates affect me?
[2] Nationwide. (2024). Bank of England base rate changes and your mortgage.
[3] Bank of England. (2024). Interest rates and Bank Rate.
