UK pay rises at record rate stoking fears of another interest rate rise

Bank of England under pressure as wages catch up with inflation

pay British wages, excluding bonuses, were 7.8% higher than a year earlier in the three months to July. Photo: Getty.
British pay, excluding bonuses, were 7.8% higher than a year earlier in the three months to July. Photo: Getty

Wage growth in the UK held at a record high in July, putting further pressure on the Bank of England (BoE) and the inflation outlook.

The latest labour market report from the Office for National Statistics (ONS) showed that British wages, excluding bonuses, were 7.8% higher than a year earlier in the three months to July.

It is the first time in nearly two years that wages have not been outstripped by inflation, with the consumer price index (CPI) measure of inflation for July easing to 6.8%.

This may add pressure on the Bank of England to hike interest rates again.

Meanwhile, the unemployment rate rose to 4.3% in the three months to July from 4.2% a month earlier — the highest since September 2021.

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The increase in unemployment was largely driven by people unemployed for up to 12 months, the ONS report said.

The rate is already higher than the 4.1% the BoE had pencilled in for the third quarter as a whole, when it published its last set of forecasts in early August.

Hannah Slaughter, senior economist at the Resolution Foundation, said Britain's big employment fall is the clearest sign yet that the BoE’s rate rising cycle is starting to cool the jobs market.

“But while higher unemployment should lead to lower wage growth in the coming months, it certainly hasn’t had that effect yet, with earnings growing at a record pace," she said.

“The short-term pay boost could end up benefiting pensioners more than workers as it is set to deliver a big permanent boost to the state pension next April. In this context it would be wholly unfair to hold down working-age benefits, especially as poorer households are already set to see their incomes fall next year.”

There was also a rise in the economic inactivity rate — up by 0.1 percentage points to 21.1%.

ONS director of economic statistics Darren Morgan said: "Earnings in cash terms continue to increase, at a record rate outside the pandemic-affected period.

"Coupled with lower inflation, this means people's real pay is no longer falling," he added.

Will the Bank of England hike rates again?

Craig Erlam, senior market analyst at OANDA, said the BoE may have little option but to raise rates again next week.

"The UK labour market figures offer something for everyone on the face of it but under the circumstances, BoE hawks will likely be more emboldened by the figures than the doves.

"Employment figures fell for a second month as the unemployment rate stayed at 4.3% which may be viewed as mildly encouraging to policymakers hoping to see more slack in the labour market.

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"But much more progress will be needed if we're going to see the vote swing in favour of a hold."

Erlam noted that the markets seem to agree, with a 25 basis point hike almost 80% priced in.

“What comes after that is harder to judge at this stage and will depend on how the data performs over the next two months,” he added.

Nicholas Hyett, investment manager at Wealth Club, said BoE hawks will likely argue that inflation remains an ingrained problem within the UK.

"Wage growth remains strong, rising ahead of wider inflation, and government forecasts suggest CPI will tick up again in August. We think that means the Bank of England will add a few more turns to the interest rate screw before declaring it’s job done."

Danni Hewson, head of financial analysis at AJ Bell, said: “There may be trouble ahead — unemployment has ticked up, the number of self-employment jobs has experienced a record quarterly fall, and we’ve seen another record high in long term sickness levels.

“The labour market has been resilient but there are signs that the stress of the last couple of years has created a few cracks. The fear is that any more pressure might mean those cracks start to crumble.”

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