Slowing wage growth “opens the way for further interest rate cuts” by the BoE this year

Wage growth has slowed to its lowest level in more than two years, which economists say could clear the way for further interest rate cuts by the Bank of England later this year, despite concerns about persistent inflation.

The Office for National Statistics (ONS) revealed on Tuesday that wage growth was 5.4 percent year-on-year in the three months to June, down from 5.7 percent in the previous three months.

It represented the smallest increase since the period to July 2022. The data found that UK workers saw an average increase of 2.4 per cent once inflation was taken into account.

“The Bank of England will welcome the further slowdown in wage growth as a sign that labour market conditions are continuing to cool,” said Ruth Gregory, deputy chief UK economist at consultancy Capital Economics.

“This provides some support for our forecast that the Bank of England will press ahead with two further 25 basis point interest rate cuts later this year.”

The statistics agency also said the unemployment rate was 4.2 percent for the three months to June, falling from 4.4 percent for the previous three months.

Ms Gregory added: “Despite the decline in the unemployment rate, we doubt that today’s release will change much for the Bank of England.

“We still think the Bank will pause in September before pressing ahead with two more 25 basis point rate cuts in November and December.”

However, the National Institute of Economic and Social Research (NIESR) said that while wage growth is slowing, it remains strong and could prompt the Bank to reconsider imminent interest rate cuts.

Monica George Michail, associate economist at NIESR, said: “Adjusted for inflation, wages rose 1.6 percent, meaning workers will see continued improvement in their standard of living.

“However, continued strong wage growth also raises concerns about more persistent inflation, which could lead the Bank of England to remain cautious about further interest rate cuts. We expect wage pressures to continue to ease gradually in the coming months as the labour market cools and unemployment rises relative to vacancies.”

The bank raised interest rates to a 16-year high of 5.25 percent last year to combat rising inflation and only cut them by a quarter point earlier this month to 5 percent.

Governor Andrew Bailey has struck a cautious tone on further cuts, and many economists believe rates will remain unchanged when the committee meets again in September.

One of the factors likely to influence this decision is Wednesday's inflation data, which is expected to show inflation rose above the Bank's 2 percent target in July, driven in part by holiday-related price increases in airfares and hotels.

Rob Wood, Pantheon’s chief UK economist, said: “The price of a one-night hotel stay has been very high this year, partly reflecting a new seasonal pattern since Covid… plus hotels are likely charging a form of dynamic pricing (based on demand).

“The ONS surveys only about 100 hotels, meaning outliers, such as a Welsh hotel price in June driven by demand for a Pink concert, can distort the figures,” he said.

“But some hotel price inflation is genuine, as a number of travel-related and labor-intensive service components of the CPI have been strong this year,” he added.

ONS data also showed that there was another decline in vacancy rates. The number of UK job vacancies fell by 26,000 to 884,000 in the three months to June.

A particularly worrying figure for Chancellor Rachel Reeves was that economic activity remains high at 9.41 million, up 350,000 from 2023.

She said the figures “show there is more to do to support people into employment because if you can work, you should work.”

“This will be part of my Budget later this year, where I will take tough decisions on spending, welfare and tax to fix the foundations of our economy so we can rebuild Britain and make every part of our country better,” he added.