UK interest rates called into question as pay growth cools

(Alliance News) - Figures from the Office for National Statistics showed on Tuesday that UK pay growth has cooled, calling into question the trajectory of interest rates.

The unemployment rate for the period from September to November was 4.2%, unchanged from the August to October period. The figure came in line with FXStreet-cited market consensus.

Also in the three months to September, annual growth in average total pay, excluding bonuses, was 6.6%. This was in line with market consensus as well and slower than growth in the previous three-month period of 7.3%.

Including bonuses, average pay growth was 6.5%, lower than market expectations of 6.8% and 7.2% in the three months to October.

AJ Bell's Russ Mould said the data will "stir the pot", as it appears that inflationary pressures are easing.

However, Mould warned: "Data points like these don't seem enough to put central banks on a different path and we're facing the risk that the likes of the Bank of England and European Central Bank will act too late to avoid a sharp economic slowdown."

Adding more to the "pot" will be UK inflation data on Wednesday, which the BoE will be forced to digest ahead of its next interest rate decision.

The BoE will make its next interest rate decision on February 1. Before that, there is the European Central Bank decision on January 25, as well as the US Federal Reserve on January 31.

According to FXStreet, Wednesday's consumer price inflation print is expected to cool to 3.8% annually in December, from 3.9% a month earlier.

The recent peak for annual inflation in the UK was 11.1% in October 2022, which the ONS estimated to be the highest since 1981. November's reading was the tamest since September 2021.

It is therefore unsurprising that Michael Hewson, chief market analyst at CMC Markets UK, said: "the next few days has the potential to shift the dial on the timing of when we might see the first rate cut from the Bank of England."

However, Hewson said: "Even if we do see a sharp slowdown in wage growth as well as in tomorrow's inflation numbers it shouldn't be forgotten that at the most recent rate meeting the three external members of the MPC voted for another 25bps rate hike."

At the BoE's December meeting, the bank rate was left at 5.25%. It is the third successive hold, following one in September, which ended a streak of 14 consecutive hikes since December 2021, and one in November.

It was a split outcome, with six Monetary Policy Committee members, Governor Andrew Bailey included, favouring the hold. Three would have preferred rates to have been lifted by 25 basis points, they were Megan Greene, Jonathan Haskel and Catherine Mann.

By Sophie Rose, Alliance News senior reporter

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