News & analysis

UK wage data out this morning showed that pay pressures continue to cool, though not fast enough in our view to see the Bank of England cutting rates until the second half of 2024.

In particular, average weekly earnings rose by 6.5% on a 3m/YoY basis in November, undershooting market forecasts that predicted growth of 6.8%. Once stripping out the impact of bonus payments, however, today’s print showed growth in line with consensus, with wage growth printing at 6.6%. On the one hand, the continued slowdown in pay growth is good news for a Bank of England that has expressed concern over the pass through of wages to inflation. Indeed, the ex-bonus figure represents a drop of 0.6pp on the October print, a significant decline. On the other hand, however, this remains far too high to be consistent with price growth stable at 2%, with wage growth needing to cool much further for the MPC to be comfortable with the idea of cutting rates, especially with some forward-looking wage indicators appearing sticky. As such, today’s data will change few minds heading into the February BoE policy decision in our view, and we continue to look for a first rate cut in August.

For FX markets, sterling has been largely unmoved by the release, with the pound softening only marginally, but with most traders seeming to take our view that this changes little for policymakers at the BoE.

Admittedly, we suspect the part of the release most closely watched by the BoE is not the headline wage measure, but rather private sector regular pay given the emphasis placed on it in communications. This dropped to 6.5% 3m/YoY in the latest release, down from 7.2% last month, and with single month figures showing pay growth of just 6.0% YoY in November. To put this in context, Bank staff forecasts for private sector regular pay saw growth of 7.2% YoY in December, with this only dropping to 6.5% in March 2024. As such, today’s print leaves pay on this measure tracking well below Bank staff forecasts, and would in isolation point to inflation pressures set to soften faster than the Bank expects.

We are not quite so confident and suspect this sentiment is shared amongst the MPC given the divergence between official wage measures and other pay indicators over the past year.

In particular, the permanent salary indicator from the REC report on jobs stood at 56.5 in the latest release, a 0.5 point rise on the November print and still well above the 50 no change mark. Furthermore, the permanent balances indicator appears to tell a similar story. Whilst it has printed below 50 for much of 2023, suggestive that some labour market easing is taking place, it is yet to fall off a cliff in the way that would support wages slowing rapidly back to a level consistent with 2% inflation. This narrative is reinforced by the Bank of England’s own Decision Maker Panel, which recorded an increase in one-year ahead wage expectations in December, rising from 5.1% in November to 5.2% in the latest release on a three-month moving average basis.

All told, whilst the data points to continued cooling in wage pressures based on this latest round of prints, we think policymakers will be far from confident that pay growth is set to cool sufficiently to achieve 2% inflation on a sustainable basis at this point.

Even so, we do expect pay pressure to continue cooling over coming months, and will likely be soft enough for the BoE to consider cutting rates by the summer. Notably, the estimated number of vacancies fell by 49,000 in Q4 to 934,000. This was in line with readings from the REC report on jobs where the permanent vacancies index has printed sub-50 every month since August, indicating falling numbers of job openings. We expect this should translate into slowing wages moving forwards, as reduced competition for workers means less bargaining power for employees to bid up pay.

Moreover, despite the uncertainty around the Labour Force survey estimates which have seen the series suspended, the ONS continues to release alternative series of estimates of UK employment, unemployment, and economic inactivity based on administrative data.

Whilst we would be conscious of placing too much emphasis on the reliability of this series too, it is notable that unemployment continues to hold steady at 4.2%, with employment and participation ticking up 0.1pp to stand at 75.8% in the three months to November. On the one hand, this still leaves the unemployment rate below the BoE’s 4.5% estimate of neutral for the UK economy. On the other hand, growing participation should mean that the labour market, and therefore wage inflation pressures, continue to soften at the margin. Taken together, today’s data is still good news for the Bank of England, and suggests that inflation in the UK should continue to cool. However, we would not get over excited just yet, with rates likely needing to stay at current levels well into 2024 to ensure that the job is seen through.



Nick Rees, FX Market Analyst


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