Interest rate cut hangs in balance after ONS figures show annual pay growth eased to 5.7% in three months to May
UK wage growth slowed in May to the lowest level in two years amid a cooling jobs market, underscoring the challenge for the Bank of England as policymakers decide whether to cut interest rates.
Figures from the Office for National Statistics (ONS) show annual pay growth eased from 5.9% in the three months to April to 5.7% in the three months to May, matching City economists’ predictions.
Unemployment was unchanged from 4.4% in April, while the number of job vacancies fell by 30,000 led by dwindling demand in retail and hospitality amid a continued slowdown in hiring across the economy.
After a sharp fall in headline inflation over recent months, real wage growth taking into account the rising cost of living has strengthened. Total real pay, including bonuses, rose by 3% on the year in the three months to May. Growth was last higher in the three months to August 2021, when it was 4.5%.
Liz McKeown, the ONS director of economic statistics, said: “We continue to see overall some signs of a cooling in the labour market, with the growth in the number of employees on the payroll weakening over the medium term and unemployment gradually increasing.
“Earnings growth in cash terms, while remaining relatively strong, is showing signs of slowing again. However, with inflation falling, in real terms it is at its highest rate in over two and a half years.”
In a sign of the cooling labour market, the latest snapshot showed there were now more than 500,000 more people out of work than this time last year, driven by a rise in economic inactivity – when working-age adults are neither in a job nor looking for one.
Although economic inactivity has come down in recent months, it remains close to a record high at almost 9.4 million, with almost a third outside the workforce due to near record levels of long-term sickness.
Liz Kendall, the new work and pensions secretary, said the UK was standing alone as the only G7 country where the employment rate was not back to pre-pandemic levels. “This is a truly dire inheritance which the government is determined to tackle,” she said.
“Behind these statistics are real people, who have for too long been ignored and denied the support they need to get into work and get on at work. It’s time for change.”
Financial markets expect Bank policymakers will hold off from cutting interest rates from the current level of 5.25% at their meeting on 1 August, instead waiting until they are convinced that inflation will remain close to the government’s 2% target before reducing the cost of borrowing.
Threadneedle Street has previously warned that inflation is likely to rise above 2% this year amid resilient wage growth and price increases in the service sector of the economy.
The figures come after headline inflation unexpectedly remained at 2% in June for a second month in a row, while underlying measures from the service sector also held steady in a development likely to dash hopes for an August rate cut.
Although wage growth is cooling, economists said at 5.7% it remained inconsistent with the Bank’s 2% inflation target. Ashley Webb, a UK economist at the consultancy Capital Economics, said the slowdown in the jobs market probably was not enough to offset strength in services inflation.
“As a result, we have changed our forecast for the timing of the first interest rate cut from 5.25% from August to September, although it is a close call,” he said.
Several members of the Bank’s monetary policy committee, including its chief economist, Huw Pill, have warned in the past week that service sector inflation and a tight jobs market could force Threadneedle Street to take a cautious approach.
Last month the European Central Bank became the first major global central bank to cut official borrowing costs. On Thursday it left interest rates unchanged.
The US Federal Reserve chair, Jerome Powell, this week hinted that it would not necessarily wait for US inflation to drop to its 2% target before cutting interest rates, bolstering expectations for a cut in September.
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