ONS wage growth data puts UK interest rate cuts 'into doubt'

ONS wage growth represented by a pound sign attached to balloons climbing into the sky

ONS wage growth data shows earnings have grown significantly in real terms

(Image credit: Getty Images)

published 16 April 2024

Continued above-inflation wage growth could mean the UK interest rate stays higher for longer, analysts have warned.

The Office for National Statistics (ONS) has found the annual percentage increase in regular earnings (excluding bonuses) was 6% over the three months to February 2024. This marked a 0.1 percentage point drop compared to the previous set of data.

But, once the Consumer Prices Index (CPI) measure of inflation was taken into account, the rate of regular pay rises grew to 2.1%. Total pay (including bonuses) rose to 1.8%. February’s CPI sat at 3.4%, with March’s data due to be released on Wednesday (17 April).

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The Bank of England looks at wage growth when it sets interest rates. It has previously warned strong pay inflation could force it to keep interest rates higher for longer due to concerns it could hike headline inflation across the economy.

It comes as tensions in the Middle East have also led to fears interest rates could yet go up. Any surge in oil prices could also see the UK recession become deeper, although the latest GDP data suggests the country has already exited its economic contraction.

ONS wage growth remains strong, but unemployment rate rises

Average regular pay growth remained relatively similar across the public and private sectors, the December 2023 to February 2024 ONS data found. Earnings (excluding bonuses) grew 6.1% for public servants, and 6% for private firms.

While this meant wages were getting stronger in numerical terms - albeit at a slower rate than previously - the actual value of incomes (without bonuses) climbed 2.1% once headline UK inflation was taken into account. This real-terms growth was the highest the ONS has recorded since the three months between July and September 2021, when the rate was 2.2%.

It means we’re seeing the strongest growth since the cost of living crisis arguably began. But earnings are still lower in real-terms than they were pre-crisis as a result of the record inflation rates we’ve seen over the past two-and-a-half years.

One potential future check on wages was a surge in unemployment between December and February. The rate of joblessness rose 0.3 percentage points to 4.2% compared to the previous three month period.

UK labour data could delay Bank of England base rate cuts, experts warn

With wages growing in real terms, economic analysts have warned that the Bank of England could delay interest rate cuts. They had been expected to come in June, although there have been concerns that what’s happening in the US could happen here.

James Smith, developed markets economist at ING Economics, said: “A surprise surge in private sector pay will be what ultimately catches the eye of Bank of England policymakers. Regular pay, which strips out volatile one-off/bonus payments, rose by 12% on a month-on-month annualised basis.

“Admittedly, one month doesn’t make a trend and in fact, if you average out the last three months of data and compare it to the same period a year ago, the rate of private sector pay growth was still down a fraction to 6.0%. Nevertheless, we know that the Bank has occasionally flagged this month-on-month change as something it does pay attention to. And at the very least, policymakers will have a keen eye on the next round of data to see if that sort of monthly growth is sustained.”

Smith added that the unemployment data and expectations that wages will “slow further” this summer could rescue the situation. But he said he expects the UK central bank to be “net-hawkish” based on wage growth.

He was echoed by Susannah Streeter, head of money and markets at Hargreaves Lansdown, who said the rise in earnings would be “likely” to mean the Bank of England is “a bit more reticent about cutting interest rates”. She added: “[The new ONS data] means there is a greater chance interest rate cuts may come a bit later in the summer, with August now looking increasingly likely, however a lot can happen in the next few months and June still can't be ruled out.”

But not everyone believes the wage figures will have as big an impact on interest rates. Paul Dales, UK chief economist at Capital Economics, said without the unemployment rate rise, he would have been “a bit worried that the UK’s disinflation process is grinding to a halt like in the US”. But given what the ONS has shown, he said he suspects “wage growth will continue to ease”, which “may allow the Bank to cut interest rates in June”.

Henry Sandercock has spent more than eight years as a journalist covering a wide variety of beats. Having studied for an MA in journalism at the University of Kent, he started his career in the garden of England as a reporter for local TV channel KMTV.

Henry then worked at the BBC for three years as a radio producer - mostly on BBC Radio 2 with Jeremy Vine, but also on major BBC Radio 4 programmes like The World at One, PM and Broadcasting House. Switching to print media, he covered fresh foods for respected magazine The Grocer for two years.

After moving to NationalWorld.com - a national news site run by the publisher of The Scotsman and Yorkshire Post - Henry began reporting on the cost of living crisis, becoming the title’s money editor in early 2023. He covered everything from the energy crisis to scams, and inflation. You will now find him writing for MoneyWeek. Away from work, Henry lives in Edinburgh with his partner and their whippet Whisper.