UK wage growth accelerates to 5.2%

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A rebound in UK wage growth has dashed expectations of a rate cut by the Bank of England this week. The Bank of England faces challenging circumstances of persistent price pressures and slowing economic activity.

Average weekly earnings growth excluding bonuses rose from 4.9% to 5.2% in the three months to September, the Office for National Statistics said on Tuesday. Economists had expected a 5% increase.

The acceleration was driven by a 5.4% rise in private sector wages as companies raised prices to cover wages, well above the level at which the BoE believes it can achieve its 2% inflation target.

Yael Selpin, chief economist at KPMG, said the figure would close the door if the BoE's monetary policy committee is likely to cut borrowing costs from 4.75% on Thursday.

Sterling strengthened against the euro according to data, with traders cutting bets on a quarter-point cut this week by less than 10%, according to levels implied in the swaps market. They now expect two more quarterly rate cuts by the end of next year, a third less likely than the three they were pricing in last week.

The BoE is fighting ongoing wage pressures amid a recession, with GDP shrinking 0.1% in October. Meanwhile, businesses are warning they may have to cut jobs to cope with the tax and minimum wage hikes announced by Prime Minister Rachel Reeves in her October budget.

Berenberg economist Andrew Wishart said the unholy combination of employment declines and wage increases would be uncomfortable for the BoE. This suggests that the link between labor market slack and wage growth has weakened. If that were the case, the BoE would have to do more damage to the economy to keep inflation down to 2%, he said.

BoE policymakers said the central bank would need time to assess how employers were responding to the budget changes as they could offset higher costs through price increases, wage pressures and workforce cuts.

Employment data on Tuesday showed a slowdown in hiring and a decline in vacancies ahead of the Budget. The number of employees on payroll increased 0.1% between September and October, following a slight decline in the previous month, bringing annual payroll growth down to 0.5%.

But HSBC economist Elizabeth Martins said these figures were ahead of budget. Since then, the medium-term outlook may be considerably less rosy, with large increases in taxes on businesses and falling confidence leading to growing concerns about growth and the labor market.

Initial data for November showed employers had 35,000 fewer employees, or 0.1%, compared to the previous month, but the ONS said this figure could be revised.

Some economists believe companies are likely to see wage increases slow sharply next year due to rising costs. James Cockett, senior economist at the CIPD body for HR professionals, warned that the start of 2025 would be a precarious time for many employers.

Hannah Slaughter, chief economist at the Resolution Foundation think tank, said there were no signs yet of large-scale layoffs by employers, but that current employment rates were not enough to keep up with the growing workforce and were on the decline. of employment.

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The ONS said unemployment was unchanged at 4.3% in the three months to October and employment was steady at 74.9%, but these measures had been unreliable over the past year due to problems with the research underpinning them.

A separate quarterly survey of employers published as part of Tuesday's data release showed the number of employee jobs in the UK was 32.3 million in September 2024, up 0.1% from June 2024.

Sterling rose slightly against the dollar in morning trading at $1.269. It rose 0.3% against the euro to 1.210, recovering its highest level since Brexit.

British government bonds fell reflecting changes in interest rate expectations, and the 10-year benchmark yield rose 0.07 percentage points to 4.51%.

Lee Hardman, senior currency analyst at MUFG, said the data was much stronger than the market had expected. He added that Britain's long-term high yields will continue to fuel pound strength.

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