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UK employers scale back expected wage growth: BoE

Businesses polled by the BoE predicted that consumer price inflation would moderate and that they would raise their selling prices more slowly in 2025

A survey conducted by British employers indicates that they anticipate a slower growth in their wage bills over the next 12 months. This will give the Bank of England greater confidence to lower interest rates shortly.

Members of the Monetary Policy Committee were closely monitoring the results of the BoE’s own Decision Maker Panel survey, which revealed that on a three-month moving average basis, expected year-ahead wage growth decreased by 0.3 percentage points to 4.2% in June.

It was the lowest reading since the series started in May 2022.

The official earnings growth measure has been running too hot for the majority of BoE rate-setters to consider cutting interest rates, but the survey released indicated that it should cool significantly, which may encourage more MPC members to loosen policy.

Former Prime Minister Rishi Sunak’s campaign to bring the Conservative Party back to power, as per the analysts, might have been hindered by the possibility of an interest rate cut in the upcoming months. However, the talks around the monetary policy relaxation may also serve as a preamble to a newly elected British government headed by Keir Starmer’s Labour Party.

“Annual wage growth was 6.0% in the three months to June, unchanged from the three months to May. Firms therefore expect their wage growth to decline by 1.8 percentage points over the next 12 months based on three-month averages,” the BoE said, as reported by Zawya.

In addition, businesses polled by the BoE predicted that consumer price inflation would moderate and that they would raise their selling prices more slowly in 2025.

In keeping with indications that pricing pressures are abating, S&P Global’s business survey released recently revealed cost pressures in the lead services sector have subsided to a level not seen since February 2021.

Meanwhile, as per the BoE Monetary Policy Committee member Jonathan Haskell, the European country’s job market is currently too strong to start cutting interest rates. Haskell, who, apart from being an external member of the apex bank’s Monetary Policy Committee (MPC), is a professor of economics at Imperial College in London, has called for caution despite renewed expectations around a reduction in interest rates.

In a speech at the Economic Statistics Centre of Excellence in King’s College, Haskell stressed there were “considerable encouraging signs” related to inflation, including that UK Consumer Price Index (CPI) inflation dropped to the 2% target rate in June 2024. However, he added, “The wage-price system in the UK has been subject to a sequence of enormous shocks over recent years.”

“The playing out of those shocks through the economy, and the continued tight and impaired labour market, means that inflation will remain above target for quite some time. I would rather hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably,” he noted further.

Haskell voted to leave interest rates on hold at the Bank of England’s last meeting in June 2024. Now his latest comments suggest that he is not likely to opt for a cut in August, which would be his last meeting on the MPC.

The Bank in June voted 7-2 to keep interest rates on hold, although minutes from the meeting showed that the decision was “finely balanced,” a sign that an August rate cut remains in play. This would follow a move by the European Central Bank (ECB), which cut its key deposit rate from 4% to 3.75% in June.

Rates have been on hold at their 16-year-high for almost a year, even though inflation fell back to its 2% target in May 2024. Despite economists and a section of the market advocating for a rate cut, the BoE believes that price rises are likely to pick up in the second half of 2024.

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