Market News

By Tom Rees, Philip Aldrick, and Irina Anghel

November 12, 2024 at 2:04AM EST

(Bloomberg) -- Bank of England Chief Economist Huw Pill said UK wages are still growing too quickly for comfort as he repeated the case for “gradual” rather than aggressive interest-rate cuts next year.

Pill made his comments in London hours after official figures showed pay growth excluding bonuses slowed only marginally to 4.8% in the three months through September. While the pace was the slowest since mid-2022, economists had predicted a larger decline to 4.7%. Private-sector regular pay growth, the gauge most closely watched by the BOE, was unchanged at 4.8%.

The BOE, which delivered 14 back-to-back rate hikes during the energy price-driven inflation shock, has cut only twice this year and signaled it is no rush to take monetary policy out of restrictive territory, leading traders to fully price in only two quarter-point reductions over the next 12 months. Its concerns center on the threat from lingering price pressure in the services industry and the labor market. 

Wage growth “remains quite sticky” and at “elevated levels” that are “hard to reconcile with the UK inflation target,” Pill said at a UBS conference. “We have seen a substantial disinflation in the UK economy, and that has allowed monetary policy restriction to be reduced. That does not mean it is job done. From our perspective, there remains some underlying inflationary pressures in the UK economy.”

Governor Andrew Bailey and bank officials are suddenly facing threats to its price stability mission on multiple fronts, including the possibility of a trade war after Donald Trump’s victory in the US election.

The Labour government’s first budget is also clouding the outlook for prices and wages, with Chancellor Rachel Reeves announcing more borrowing for public investment, another large hike in the minimum wage and a surge in employers’ national insurance contributions. 

Businesses may respond to the huge tax hike by passing it back onto workers through lower wage increases, cutting jobs or lifting prices for consumers. The BOE is unsure how firms will respond but noted that the scope for passing on cost increases currently appears to be “limited” due to subdued demand.

What Bloomberg Economics Says...

“The stickiness in private sector pay growth in September vindicates the Bank of England’s cautious approach to easing. With the recent budget also lifting the risks to price- and wage-setting behavior further ahead, our view is that the central bank will keep cutting rates at a quarterly pace over the coming year.”

—Ana Andrade and Dan Hanson. Click to read the REACT on the Terminal

There was evidence of some further loosening in the labor market, with both employment and unemployment rising as more people came off inactivity and moved back into the workforce. However, the ONS cautions that the numbers are not entirely reliable due to problems with the Labour Force Survey.

The ONS data showed that unemployment rose to 4.3% from 4%, a bigger increase than forecast, though officials are wary over interpreting the data after problems with response rates to the survey.

There was a sharp 162,000 fall in the number of people neither with a job nor looking for one to 9.25 million, the lowest level since the three months to October 2023. The shift contributed to a 220,000 increase in employment and a 50,000 increase in unemployment over the quarter. 

The fall in inactivity was a result of lower student numbers and fewer people saying they were off work to look after the family home. There was a small 20,000 drop in people out of work with long-term sickness, an issue that the government is trying address. About 2.78 million were unable to work due to chronic health conditions – up 670,000 since before the pandemic.

“There is little here to suggest the Bank needs to worry that the loosening in the labor market and the easing in underlying wage growth are coming to an end,” said Paul Dales, chief UK economist at Capital Economics. The easing in private-sector regular pay over the past year “suggests that the Bank of England will continue to cut interest rates gradually.”

The latest labor market figures also show:

• Household finances continued to be boosted by a recovery in real regular pay. Earnings when adjusted for inflation rose 2.7%. But it was weakest pace since the first quarter and real wages are barely higher than their peak in 2008 before the financial crisis struck

• Vacancies continued to drop off in a sign of easing demand for labor, slipping back in the three months to October to 831,000. That remains slightly above the level seen just before the pandemic
• Total wage growth, which includes bonuses, saw an unexpectedly strong pickup to 4.3%, up from 3.9%. While this was the first acceleration in six months, the figure was boosted by one-off bonuses for civil servants