Wage growth remains sticky – what it means for interest rates

Regular wages grew by 6% annually in February to April this year, according to the latest figures released by the Office for National Statistics (ONS) today. 

The figure was unchanged compared with last month’s report – bad news for those clinging onto the hope of an interest rate cut at the upcoming Monetary Policy Committee (MPC) meeting on 20 June. 

Average total earnings (including bonuses) grew by 5.9% over the same period, also showing no movement compared with last month’s report. We look at what the latest data means for households, investors and the economy. 

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What’s driving the latest wage growth figures?

The latest data shows that earnings growth is particularly strong in the public sector, coming in at 6.4% versus 5.8% in the private sector. However, within the private sector, the finance and business services sector saw the largest annual growth at 6.9%. All of these figures refer to regular pay, excluding bonuses. 

Despite this, a technical factor could have contributed to the stubbornness in the figures too. Alice Haine, personal finance analyst at Bestinvest, points out that the latest report “includes the month of April when the National Living Wage [...] increased by almost 10% to £11.44 an hour and was extended to employees aged 21 and over.” Previously, workers had to be 23 to qualify. This measure was announced in chancellor Jeremy Hunt’s 2023 Autumn Statement. 

On top of this, businesses say they are still having trouble hiring and retaining the skilled staff they need. Although the unemployment rate is on an upward trend, “labour shortages remain one of the biggest challenges facing businesses,” according to Matthew Percival, future of work and skills director at the Confederation of British Industry (CBI). 

To attract and retain employees, businesses have to ensure their wages are competitive. This also creates challenges – their costs have already risen considerably in recent years thanks to inflation. Higher interest rates have also pushed up the cost of borrowing, making it more expensive for them to service their debts.

When will interest rates fall?

The Bank of England keeps a close eye on wage growth data when setting interest rates, as wages are a big driver of inflation. The Bank has been holding the base rate at 5.25% since August 2023 in an attempt to quell rising prices, but governor Andrew Bailey has recently hinted that things are “moving in the right direction”. 

The European Central Bank (ECB) made its first interest rate cut in almost five years earlier this month, joining the likes of Sweden, Switzerland and Canada, who have also started to loosen their monetary policy. The MPC is next due to meet on 20 June, however most experts and market participants believe the committee will hold rates at their current level at that meeting. 

Even before today’s wage growth figures, a June interest rate cut was looking unlikely, as April’s inflation data was more stubborn than many would have liked. While the headline inflation rate slowed to 2.3% thanks to falling energy prices, core and services inflation are proving more persistent. 

What’s more, with the general election just around the corner, the Bank of England is unlikely to want its decision to become politicised. We explored this in a recent piece: “Will a general election delay interest rate cuts in the UK?”

Despite this, the labour market is showing signs of cooling in other places. The unemployment rate rose to 4.4% over the same period, up from 4.3% in last month’s report. There are now 1.7 unemployed people per vacancy. Naturally, the rising unemployment rate will be worrying news for workers. However, the one positive is that it could spur the Bank of England into action for an August cut, even if June is looking unlikely. 

James Smith, developed markets economist at ING Economics, thinks markets are being too quick to rule out a summer rate cut. He says: “The UK jobs market is cooling quite noticeably now, and that makes it all the more surprising that financial markets are pricing just a 7% probability of a rate cut next week and only 46% for August’s meeting. We think a summer rate cut is much more likely.” 

What does this mean for investment markets?

Equity investors will be hoping the Bank of England cuts interest rates sooner rather than later. Rate cuts are typically good news for equity markets, as they tend to boost the economy and earnings, resulting in stronger company performance. 

The Investment Association (IA) reports that fixed income and global equity funds were the bestselling investments among retail investors in April, with £1.2bn and £1.1bn in net inflows respectively. Fixed income also proves popular at the top of the interest rate cycle, as investors look to lock in higher yields before rates are cut.

What does the latest labour market data mean for the general election?

Wage growth continues to outpace inflation, which is good news for workers. The Conservatives will be pleased to see this – they have ridden into this election campaign wearing the economy as their battle standard. “Pay packets are now stretching much further than they did a year ago, giving household budgets some breathing space after a challenging couple of years,” adds Haine. 

That said, the latest labour market data also shows a continued uptick in the rate of unemployment. This has now hit 4.4% – the highest level since September 2021. This will complicate the message for Rishi Sunak. 

“Worryingly, the UK employment is closer to its mid-pandemic lows, than its pre-pandemic high,” says Nye Cominetti, principal economist at the Resolution Foundation. “Turning around this poor performance, and kickstarting the kind of jobs growth Britain experienced in the 2010s will be a key task for the next government,” he adds.