UK wage growth continues to slow

UK wage growth continued to slow in the three months to January, confirming the Bank of England’s view that inflationary pressures were easing in the economy.

The Office for National Statistics said average earnings, including bonuses, were 5.6 per cent higher over the period than a year earlier — down from an annual growth rate of 5.8 per cent in the three months to December. Excluding bonuses, annual growth slowed from 6.2 per cent to 6.1 per cent.

The slowdown in total pay growth across the economy was slightly sharper than analysts had expected — total pay growth was forecast at 5.7 per cent — leading traders to price in a slightly higher chance of the BoE cutting interest rates by June.

After the data release, sterling slipped 0.15 per cent against the dollar to $1.2792 while traders in swaps markets boosted their bets on the BoE easing policy this year.

The probability of the first 0.25 percentage point cut being delivered by June rose from about 50 per cent to 60 per cent, with traders moving to price in three cuts by the end of the year.

However, economists noted that private sector pay growth — which the BoE watches closely — was still slightly stronger than policymakers were expecting when they last published forecasts in February.

Paul Dales, chief UK economist at the consultancy Capital Economics, said the easing in pay growth was “probably still a bit too slow for the Bank of England’s liking”, although there were “signs that a more marked slowdown is just around the corner and that an interest rate cut in June is possible”.

Pay growth slowed against the backdrop of a softening jobs market, with fewer vacancies, stalling growth in the number of payrolled employees and an uptick in the number of people claiming jobless benefits.

The Bank of England has made it clear that even though inflation was likely to fall to, or even below, its 2 per cent target within the next few months, it still thought there were underlying price pressures bubbling in the economy, meaning it would take longer to get inflation durably back to target.

Huw Pill, the BoE’s chief economist, said in a recent speech that while there were now “early signs” of the persistent part of inflation easing, there was “some way to go” before the evidence became conclusive.

But Pill also said that keeping policy restrictive “does not necessarily mean leaving bank rate unchanged”.

Rob Wood, chief UK economist at the consultancy Pantheon Macroeconomics, said the data would “give the BoE a little more confidence that they can cut rates in the summer” but that policymakers would still want to monitor the effects of the rise in the minimum wage in April.

The ONS warned that its headline estimates of unemployment and employment should be treated with caution, as continuing problems with the survey underpinning them made them volatile.

The agency said its survey suggested unemployment was 3.9 per cent in the three months to January, up from 3.8 per cent in the three months to December and from 3.8 per cent a year earlier.