It is virtually certain that the Bank of England will cut interest rates this summer, either in June or in August.
Following the Bank’s latest interest rate decision, Andrew Bailey, the Bank’s governor, said a June rate cut was “neither ruled out nor a fait accompli.” It would all depend on the data.
By June, policymakers will have an extra two inflation releases to digest and one more update on the labour market, after a new release was published this morning. The latest update leaves policymakers in a bit of a bind.
From one perspective, the data clearly pushes the Bank in favour of an August rate cut. Annual regular pay growth remained at 6.0 per cent in the first quarter of the year, unchanged compared to the last round of figures and ahead of expectations.
It was a similar story on total pay growth, which includes bonuses. Total pay grew 5.7 per cent, in line with last month’s upwardly revised figure of 5.7 per cent. Economists had expected it to fall to 5.5 per cent.
Early estimates for April indicate that median monthly pay increased by a massive 6.9 per cent compared with last year, a worrying sign for the Bank if it persists. The MPC thinks that wage growth needs to be closer to three per cent to be consistent with inflation falling back to target.
Posting on X, Simon French, head of research at Panmure Gordon noted this was “not the type of data you want to see from UK pay & wages to support a June interest rate cut”.
But the data also points to a continuing slowdown in the labour market. Vacancies fell for the 22nd consecutive month, unemployment increased while the number of payrolled employees also fell.
Private sector wages, which the Bank of England puts more emphasis on, slipped to 5.9 per cent from a previous reading of 6.0 per cent.
“The labour market is starting to react to the sluggish growth that we’ve had in the economy in the last couple of years and I fear there are probably some more job losses to come,” Michael Saunders, a former rate-setter at the Bank of England said on BBC Radio 4’s Today Programme.
“To be sure, pay growth is still quite high – and a little too high for the Bank of England’s comfort – but the signs are that pay growth will slow further,” Saunders continued.
Perhaps then it is only a matter of time.
The Bank of England has to look forward and a loosening labour market does make it more likely that wages will fall further in the future.
The next round of figures will be doubly important because it will start to factor in the impact of April’s near 10 per cent hike in the National Living Wage. This could contribute to a bump in wage settlements, although the full effects will not be clear until later in the summer.
There’s another complication which is worth noting. Wage growth is just a proxy for domestic inflation. There’s the potential for a disconnect to emerge between wage growth and price increases if firms simply absorb the extra costs.
Bailey raised this possibility at the Bank’s last press conference. “I’ve heard stories around the country of companies saying they’re probably a bit less likely to pass these things (higher wages) through at the moment,” he said.
So there’s a lot to consider. But today’s data does not decisively tilt the balance towards June or August. The debate will rumble on right up until the next decision.