Strong wage growth forces Bank of England to make tough interest rate decision

Pressures in the UK job market are beginning to ease, but wage growth has not slowed as much as economists had hoped, according to official data released on Tuesday.

figures from the Office for National Statistics showed that average wages in the private sector, excluding bonuses, were 6.9 percent higher in the three months to February than a year earlier, below growth of 7.3 percent in the last quarter of 2022.

Public sector wage growth still lagged that of the private sector, but by a smaller margin, with average wages excluding bonuses rising 5.3 percent on the year.

The data leaves the Bank of England Monetary Policy Committee with a finely balanced decision on whether raise interest rates from a 15-year high of 4.25 percentor keep them unchanged for the first time in 18 months, when it meets on May 11.

The slowdown in wage growth, one of the key indicators policymakers are tracking, was more gradual than expected, due to revisions to January figures and a further acceleration in wages in February.

Victoria Clarke, an economist at Santander CIB, said Tuesday’s figures “do not provide reassurance that the MPC it is likely looking” for wage growth to moderate toward rates consistent with its 2 percent inflation target.

Modupe Adegbembo, an economist at Axa Investment Managers, said the renewed strength in wages would “disturb the MPC, raising fears of further persistence of inflation.”

But other developments suggested that the labor shortage that has fueled wage increases was beginning to abate.

The unemployment rate rose to 3.8 percent from 3.7 percent the previous quarter, the number of job openings fell for the ninth straight month and the number of people choosing not to work or looking for work fell as students They returned to the workforce.

This decline in economic inactivity prompted the employment by 0.2 percentage points from the previous three-month period to 75.8 percent.

However, most of the growth was driven by part-time work and self-employment rather than job creation by employers. Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, said this showed the labor market was “not as hot as the jobs figures imply”. But he added that the revisions to the wage growth data meant the MPC was just as likely to leave rates unchanged or raise them by 25 basis points.

Despite the increase in employment, the UK workforce remains smaller than it was before the Covid-19 pandemic. The number of economically inactive people of working age remains more than 400,000 above its pre-pandemic level; almost all of the increase represents people who say they are out of work due to a long-term health condition.

Tony Wilson, director of the Institute for Employment Studies, a research consultancy, said post-pandemic progress in increasing the number of people in work had been “painfully slow” and that it was “clearer than ever that others are leaving behind”. big economies.

Business groups also warned of continued hiring difficulties. Neil Carberry, head of the Recruitment and Employment Confederation, described the worker shortage as “the defining feature of our job market right now.” However, he said the situation was “not as fizzy” as it was in 2022, with wages “rising sharply. . . but not at a rate that causes more inflation.”

Jane Gratton, head of personnel policy at the British Chambers of Commerce, said vacancies remain “a drag anchor for businesses, preventing them from fulfilling orders and taking on new jobs.” She called on ministers to quickly implement their promised expansion of free child care and be “pragmatic” about expanding the list of rare occupations for which immigration requirements are relaxed.

Employment Minister Guy Opperman said the government was boosting training and childcare to “break down the barriers for people out of work”, while raising the minimum wage and extending cost support payments. life.