News & analysis

UK wage growth overshot expectations in March, with headline readings showing no further cooling relative to February.

That said, with some details of today’s report are not as hawkish as the headline figures suggest either, we think this leaves the prospects of a June cut to Bank Rate hanging in the balance. In our view, upside risks from April’s National Living Wage rise should favour caution from the BoE, and an August start to policy easing. But with today’s figures offering little clarity on this point, policymakers and markets will now need to closely scrutinise next month’s readings in the hope of further clarity.

Turning to the data, average weekly earnings rose by 5.7% 3m/YoY in March, unchanged from an upwardly revised reading for February, and 0.2pp above consensus expectations.

Once adjusting for bonuses, pay growth similarly flatlined at 6.0% in the three months to March when compared with a year earlier, modestly overshooting expectations for a 5.9% print. Whilst this positive surprise is arguably a little concerning for policymakers at the margin, perhaps more worrying is that single month estimates hinted towards a possible reacceleration in price growth in March. Stripping our bonuses, whole economy pay growth rose from to 6.2%, up from 5.9% the month prior in these latest figures, with private sector regular pay climbing by 0.1pp to 5.9%.

Given this possible reacceleration in pay pressures, many will be wondering if this is potentially the result of April’s National Living Wage rise. We think it is too early to judge just yet. Looking at sectoral data, pay for wholesaling, retailing, hotels–the grouping that covers a significant number of low wage role–rose modestly in March on a single month basis, but remains below recent average at 5.7% YoY. Moreover, digging deeper into the industry level figures does little to clarify this picture. Excluding bonuses and arrears, single month earnings growth in accommodation and food services rose from 9.4% in February to 10.0% in March, with pay in the arts, entertainment and recreation rising from 4.2% to 6.2%, and wage growth for retail trade and repairs climbing from 9.2% to 10.2%. Set against this, however, wholesaling printed at -2.7%, only a marginal improvement on February’s -2.8%.

Moreover, with the NLW due to rise by almost 10%, we think that at least some of these increases look too small to be consistent with the full impact of the minimum wage change.

All told, we are inclined to think that at least some of the impact of the NLW rise has been felt this month based on today’s figures. How much, exactly, is a question that will likely have to wait until the April data has been delivered for an answer. As we have noted previously, however, we think this uncertainty weighs in favour of caution from the BoE, leading us to hold onto our call for an August start for Bank Rate cuts, at least for the time being. It is notable however, that despite these concerns, it was not all bad news for the BoE in today’s figures. Significantly, private sector regular pay dipped slightly on a 3m/YoY basis, falling 0.1pp to 5.9%. This leaves pay growth on this measure 0.1% below the 6.0% growth that Bank staff had predicted for Q1 in the May Monetary Policy Report.

Taken as a whole we think today’s figures are broadly net neutral for policymakers.

Indeed, traders have been inclined to view the data in a similar vein so far this morning. Market implied expectations for a June BoE remain broadly unchanged at just over 50%, and sterling has barely moved on this latest data. In our view, this now shifts the focus onto next month’s pay data, alongside the two upcoming CPI releases, as key to determining the odds that the MPC cuts rates in June,  and as such the prospects for sterling heading into the end of Q2.



Nick Rees, FX Market Analyst


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