Britain's Wage Growth and Its Impact on BoE's Inflation Goals

Wage growth in Britain has slowed but remains high, adding uncertainty to potential Bank of England interest rate cuts. Data shows a rise of 5.7% in earnings, excluding bonuses, in the three months to May. The BoE's next rates announcement is due on Aug. 1.

Wage growth in Britain has decelerated but still stands at levels too high for the Bank of England (BoE) to maintain its 2% inflation target, sparking doubts about an upcoming interest rate cut. Official data reveals that earnings, excluding bonuses, grew by 5.7% in the three months to May, year-on-year.

This marks the slowest increase in core pay since summer 2022, when employers raised salaries to attract staff amid a labor shortage. Despite the publication of this data, sterling and British interest rates futures saw little change.

"A modest slowing in pay growth offers some good news for those looking for a rate cut in August," remarked Yael Selfin, Chief Economist at KPMG UK. "However, with annual pay growth excluding bonuses at 5.7%, the BoE might hesitate to cut rates before seeing further cooling in the labour market."

Total earnings, including bonuses, also saw a 5.7% rise over the period, matching the median forecasts in a Reuters poll of economists. In the three months to April, regular pay had risen by 6.0% annually, and total earnings were up by 5.9%. The BoE's next rate announcement is set for Aug. 1.

Following stronger-than-anticipated inflation data published recently, investors are pricing in a roughly one-in-three chance of the first rate cut since 2020. Separately, the Office for National Statistics (ONS) announced a delay in switching to a new version of its Labour Force Survey, aimed at tackling declining response rates.

The ONS revealed that the Transformed Labour Force Survey (TLFS) attracts more respondents but shows a bias towards older individuals who favor online surveys. The ONS will continue using the current Labour Force Survey (LFS) until further developments, with a progress report expected in early 2025.

Thursday's data indicated further cooling of Britain's labor market, with vacancies declining by 30,000 in the April-to-June period, marking the 24th consecutive fall. Despite this, vacancies remain nearly 12% higher than pre-COVID levels. The unemployment rate, based on the LFS survey, held steady at 4.4%.

(With inputs from agencies.)