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BOE rate cut: rising UK pay growth adds complexity to monetary policy moves

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January 21, 2025
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BOE rate cut: rising UK pay growth adds complexity to monetary policy moves
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The UK’s average weekly earnings grew by 5.6% in the three months to November, according to the Office for National Statistics (ONS), marking a notable acceleration from the 5.2% recorded in October.

This uptick, driven by strong private-sector performance, aligns with expectations for total pay growth while slightly exceeding projections for regular pay (excluding bonuses).

Liz McKeown, the ONS director of economic statistics, said, “Pay growth picked up for a second consecutive period, again driven by strong increases in the private sector. Real pay growth, which excludes the effects of inflation, increased slightly.”

This rise in earnings signals resilience in the labour market despite an environment of economic uncertainty.

Weak retail sales data added to low UK inflation figures had fuelled expectations that the Bank of England may ease monetary policy this year.

However, the persistence of strong pay growth has intensified concerns over inflationary pressures, adding complexity to the Bank of England’s (BoE) monetary policy considerations.

UK labour market shows signs of cooling

Despite robust wage growth, there are emerging signs of a cooling labour market.

The UK unemployment rate for those aged 16 and over rose to 4.4% in the three months to November, up from 4.3% in October.

Additionally, job vacancies declined by 24,000, marking the 30th consecutive monthly drop.

However, the number of job openings remains above pre-pandemic levels, indicating that labour demand, while slowing, has not yet returned to historical levels.

Chancellor Rachel Reeves faces increasing pressure to navigate these economic complexities.

Experts warn that the government’s planned £25 billion increase in employer national insurance contributions and a 6.7% hike in the minimum wage from April 2025 could amplify inflationary risks, potentially undermining broader economic stability.

BoE caught between growth and inflation

The BoE’s decision on whether to adjust interest rates at its February 6 meeting has been complicated by conflicting economic signals.

While better-than-expected inflation data last week fueled speculation of a rate cut from the current 4.75%, the stronger-than-anticipated wage growth could shift the balance.

Several BoE policymakers have expressed concern that sustained pay increases could prompt businesses to raise prices, further entrenching inflation above the 2% target.

Others argue that as economic growth slows and the effects of past rate hikes take hold, wage pressures may naturally ease, reducing the need for aggressive monetary tightening.

The divergence in views reflects the broader challenge of managing the UK economy during a period of heightened uncertainty.

Data quality raises questions for policymakers

A key issue complicating the BoE’s task is the reliability of official labour market statistics.

The ONS recently admitted that its labour force survey, a critical tool for assessing employment trends, suffers from low response rates and has been hampered by a poorly executed transformation programme.

The situation is unlikely to be fully resolved until 2027, leaving policymakers to make decisions with potentially flawed data.

This “flying blind” scenario could result in monetary policy missteps, adding further risks to the economic outlook.

Government priorities and policy implications

Liz Kendall, the work and pensions secretary, said, “Today’s figures are more evidence that we must get Britain working, which is why this government is relentlessly focused on driving up opportunity and driving down barriers to success in every part of the country.”

Kendall added:

With real wages continuing to rise we are working to boost living standards and get the economy growing as part of our plan for change by reforming job centres, joining up fragmented local support and guaranteeing every young person has the chance to be earning or learning.

The government’s efforts to boost living standards and support job creation include reforms to jobcentres and measures to guarantee opportunities for young people.

However, balancing these initiatives with fiscal discipline remains a significant challenge, particularly amid warnings of higher borrowing costs.

The post BOE rate cut: rising UK pay growth adds complexity to monetary policy moves appeared first on Invezz

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