First UK wage growth pickup in a year dampens rate-cut bets

UK WAGE growth accelerated for the first time in more than a year, prompting traders to scale back bets on Bank of England (BOE) interest-rate cuts.

The pickup in pay growth excluding bonuses to 5.2 per cent in the three months through October came on the back of a surge in private-sector wages, the Office for National Statistics said on Tuesday (Dec 17). It was the first acceleration since August 2023 and well above the 5 per cent economists were expecting. 

Money markets unwound bets on rate cuts after the shock figures. The implied chance of three quarter-point cuts in 2025 fell to around 55 per cent, down from 90 per cent before the report. The pound erased a small loss to trade 0.2 per cent stronger at US$1.2707.

Private-sector regular pay growth, the gauge most closely watched by the BOE, jumped much faster than expected to 5.4 per cent from 4.9 per cent.

The central bank was forecasting an increase to 5.1 per cent for the three months to December. There were large pay rises in the construction and finance and business services sectors. 

Inflation-busting public-sector pay awards announced by the new Labour government after winning the July general election are expected to begin feeding into the official figures from next month, the ONS said. In October, public-sector pay growth slowed to 4.3 per cent from 4.7 per cent.

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The surprise earnings data comes just ahead of Thursday’s rate decision by the Monetary Policy Committee (MPC). It is widely expected to keep policy on hold at 4.75 per cent, a position reinforced by the pay data as officials continue to worry about lingering pressures in the labour market. 

Inflation figures on Wednesday are expected to reinforce the BOE’s concerns, with consumer-price growth forecast to rise to 2.6 per cent in November from 2.3 per cent. Services inflation, a key gauge of underlying pressures, is forecast to remain stubbornly high above 5 per cent.

“The jump in wage growth excluding bonuses to 5.2 per cent puts another nail in the coffin of an interest rate cut on Thursday,” said Thomas Pugh, economist at RSM UK. “Our base case is that the MPC will cut rates once a quarter next year, but strong wage growth and a second Trump presidency increases the risk of fewer rate cuts.”

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UK economy in October suffers first back-to-back declines since 2020

With both wages and services inflation growing faster than levels consistent with the BOE’s 2 per cent inflation target, markets are cautious. The bank, which delivered 14 back-to-back rate hikes during the energy price-driven inflation shock, has cut rates twice this year.

The outlook for wages and employment is under particular scrutiny at the moment after Labour’s £26 billion (S$44.5 billion) payroll tax on employers and another hike in the minimum wage. BOE governor Andrew Bailey has said policymakers want to see how businesses pass the costs on. 

Tax data showed that employment slipped back by 35,000 in November, which chimed with surveys suggesting businesses have already started trimming their headcounts.

Vacancies also weakened, with the single-month figures showing a 63,000 drop in job postings to below 800,000 in November. The three-month figure also showed a fall.

The economy has lost significant momentum since Labour took office, with figures last week showing gross domestic product shrank for a second month in October.

Deutsche Bank chief UK economist Sanjay Raja said that cooling demand for workers will at some point begin to weigh on wages and prices. “Jobs demand is falling fast. Payrolls are shrinking and this will eventually hit demand and medium-term price pressures,” he noted.

For the moment, household incomes continued to be helped by wage rises outstripping price growth. Regular pay climbed 3 per cent in real terms.

The unemployment rate was unchanged at 4.3 per cent between August and October, though officials are wary about using the data due to severe problems with response rates.