Hopes for Interest Rate Cuts Rise as Wage Growth Slows

Expectations for a potential cut in UK interest rates next month have gained momentum following a report indicating that wage growth has slowed to its lowest rate in over two years. Official statistics reveal that pay increased by 4.9% between June and August, down from the previous 5.1%.

This decrease in wage growth has contributed to speculation that the Bank of England may lower interest rates to 4.75% during its meeting in November. Although wage growth continues to outpace inflation—which gauges the rate of price increases—analysts suggest that this won’t hinder the Bank’s plans to adjust borrowing costs. The Bank of England closely monitors wage growth, as rapid increases can lead to higher costs for businesses, which may, in turn, raise prices for consumers.

Yael Selfin, chief economist at KPMG UK, characterized the wage growth figures as “encouraging” in conjunction with the deceleration of economic growth. She predicts that the Bank of England will respond by reducing rates from the current level of 5%.

In the most recent jobs data released prior to the upcoming Budget announcement, the Office for National Statistics (ONS) reported a decrease in the unemployment rate to 4%. However, Ashley Webb, a UK economist at Capital Economics, cautioned against interpreting this as a sign of a booming job market. The ONS has urged caution regarding its unemployment figures, citing issues with the survey data it collects. An alternative measure indicates that the number of employees on payrolls has flattened in recent months, highlighting a potential stagnation in employment.

The number of job vacancies has also declined, falling to 841,000 between July and September, though this figure remains above pre-pandemic levels. Recruitment agencies are observing a slowdown in the jobs market, attributing it to a combination of sluggish economic growth and the impact of rising interest rates over the past two years. James Reed, CEO of consultancy Reed, described the current state of the job market as “a slow-motion car crash,” indicating that companies are hesitant to hire due to a lack of confidence.

Employers are reportedly delaying hiring decisions as they evaluate the financial implications of Labour’s proposed enhancements to workers’ rights and await Chancellor Rachel Reeves’ forthcoming Budget announcements. Speculation is mounting that the government may increase National Insurance contributions for businesses, a possibility that Prime Minister Rishi Sunak did not rule out during a recent BBC interview.

The ONS also noted a slight decrease in the rate of economic inactivity—defined as individuals aged 16 to 64 who are neither employed nor actively seeking work—to 21.8%. Despite this drop, concerns persist over worker shortages impacting the UK economy, with the inactivity rate remaining elevated since the pandemic began.

In other economic developments, data released recently indicated a slight upward revision in the wage figures from the previous month. This adjustment could have implications for state pension payments starting next April. Specifically, the new flat-rate state pension for those reaching retirement age after April 2016 is projected to rise to £230.30 per week, translating to an annual amount of £11,975—a £473 increase from the current rate. Similarly, the basic state pension for individuals who retired before April 2016 is expected to increase to £176.45 per week, amounting to £9,175 per year, an increase of £361.

Sir Steve Webb, a former pensions minister and partner at advisory firm LCP, acknowledged that while a higher rate of pension increase is beneficial for retirees, it will represent an additional £100 million cost for the Chancellor as she prepares for the Budget.

As the economic landscape continues to shift, all eyes will be on the upcoming Bank of England meeting and the government’s fiscal strategies in response to these evolving wage and employment trends. The interplay between wage growth, inflation, and interest rates remains critical to shaping the UK’s economic trajectory in the months ahead.