Early interest rate cut in doubt amid ‘sticky’ wage growth

Wages are still growing far faster than inflation, putting the chances of an early interest rate cut at risk, latest official figures reveal today.

The Office for National Statistics (ONS) said regular wages rose at an annual rate of 6.1% in the November to January quarter, down only from 6.2% previously. 

The rate of increase was 5.6% if bonuses are included. After inflation is taken into account, pay went up in real terms by 1.8%, or 1.4% if bonuses are added. While workers will welcome the boost to living standards, the only slow easing of wage growth will cause headaches at the Bank of England where the Monetary Policy Committee (MPC) will be looking for irrefutable evidence that pay pressure is being squeezed out of the labour market before cutting rates.

Today’s figures come ahead of a 9.8% rise in the minimum wage next month that will mean an above-inflation increase for three million workers. 

Under 20s get a 14.8% rise, which will have a huge impact on industries that hire many students, such as hospitality. 

The ONS said the rate of unemployment lifted to 3.9% in the three months to January from 3.8% in the previous three months; vacancies fell by 43,000 quarter on quarter in the three months to February to 908,000 — the 20th drop in a row. 

Chancellor of the Exchequer Jeremy Hunt said: “Our plan is working. Even with inflation falling, real wages have risen for the seventh month in a row. And take home pay is set for another boost thanks to our cuts to National Insurance which in total are putting over £900 a year back into the average earner’s pocket.” 

Thomas Pugh, economist at consulting firm RSM UK, said: “With the unemployment rate still low at 3.9% and pay growth sitting at 5.6%, most MPC members won’t see a reason to rush towards cutting interest rates at its meeting next week. That said, wage growth is slowing much more quickly than the headline figure suggests and inflation will soon be back below 2%. That will set the stage for a first rate cut in the summer and for interest rates to end the year at 4.5%.” 

Ben Harrison, director of the Work Foundation think tank, said: “Workers will welcome the 16th consecutive month of above 6% regular pay growth, which represents 1.8% real wage growth on the year. However, most are unlikely to be feeling richer as the Office for Budget Responsibility still forecasts real wages won’t get back to 2008 wage levels until 2026.”