Wage growth remains high – implications for interest rates

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published 14 May 2024

Regular wages (excluding bonuses) grew by 6% in the first quarter of 2024, according to the Office for National Statistics (ONS). That’s compared to the same period a year before. This reading was higher than expected, and marks no slowdown compared to last month’s report. Economists polled by Reuters were expecting the figure to come in at 5.9%.

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 households and businesses across the country are hoping for a rate cut this summer.

The earliest the base rate could be cut is at the next Monetary Policy Committee (MPC) meeting in June, but most experts think August is more likely.

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After the rate-setting meeting on 8 May, Bank of England governor Andrew Bailey expressed optimism that things were “moving in the right direction”. However, he also said that the Bank would need to “see more evidence” of slowing inflation before cutting rates.

He stressed that the Bank would be led by the data, saying: “Before our next meeting in June, we will have two full sets of data for inflation activity and the labour market, and that will help us in making that judgement afresh. But in saying that, let me be clear. A change in Bank Rate in June is neither ruled out nor a fait accompli.”

We look at what the latest labour market data could mean for inflation and interest rates.

Is the labour market cooling?

Today’s labour market data reveals that wage growth is still stubbornly high. At 6%, regular wage growth (excluding bonuses) has not slowed at all compared to last month’s report. On a sector-by-sector basis, the manufacturing sector and the finance and business services sector are seeing the fastest growth, at 6.8%.

Despite this, there are some signs that the labour market is cooling. The UK unemployment rate is estimated to have risen to 4.3% in the first three months of the year. This is the highest rate since May-July last year.

Meanwhile, the number of job vacancies has fallen again for the twenty-second consecutive month. There are now 1.4 vacancies per unemployed person, down from 1.6 in last month’s report.

A higher unemployment rate and fewer vacancies is worrying news for workers, but it does suggest higher interest rates are starting to have the desired effect. Businesses and consumers have less cash to spare when interest rates are high. This means they cut back on spending which, in turn, slows the rate of inflation.

Consumer price inflation came in at 3.2% over the 12 months to March, down from a peak of 11.1% in October 2022.

What do the latest wage growth figures mean for interest rates?

The latest wage growth figures could make the Bank of England more nervous about cutting the base rate – particularly when coupled with last week’s stronger-than-expected economic growth data. The latest GDP figures, released on 10 May, revealed the UK economy grew by 0.6% in the first three months of the year, officially exiting recession.

“On the surface, the wage growth figure is a stark reminder that there is still some way to go in fully quashing second-round domestic price pressures,” says Kyle Chapman, FX markets analyst at Ballinger Group. “It’s certainly in the wrong direction, and today’s headline will bolster the case for the Bank of England hawks to argue against a cut at the June meeting,” he adds.

Despite this, after last week’s interest rate decision, the governor of the Bank of England warned against overinterpreting individual inflation indicators, saying: “There will always be some ups and downs in the data, and the news we have had recently has been within the volatility we should expect in normal times.”

With this in mind, Chapman believes that policymakers “should be able to look through [the latest wage growth report] if next week’s services CPI print shows some positive signs”.

Are households better or worse off?

Stubborn wage growth figures could delay interest rate cuts. However, a pay rise is always good news if you are a worker. Wage growth is now outpacing inflation by some margin, which means consumers should be feeling the effects of it in their wallet. This extra cash will be very welcome at a time when prices are still high.

The bad news is that mortgage rates (and the cost of servicing any debts) will also remain high until the base rate comes down. In fact, some of the UK’s biggest providers including NatWest, Santander and Nationwide have increased their mortgage rates in the past month. This means that, for many households, any wage increases will quickly be swallowed up.

What’s more, a rising unemployment rate could prove worrying for many workers. On the one hand, the economy has proved more resilient than expected, growing by 0.6% in the first quarter of the year. However, “some businesses may still be looking to rein in costs to protect profits as they analyse the fallout from a difficult couple of years”, says Alice Haine, personal finance analyst at Bestinvest. “This means redundancies are not off the table yet,” she adds.

If workers are worried about the risk of redundancy, one step they can take is to build up more of a savings buffer. Haine recommends building an emergency fund that can cover six months of expenses, paying down expensive debts, and avoiding unnecessary expenditure.

One important tip is to pick a high interest account when stashing away your emergency fund for a rainy day. Lots of providers are currently offering inflation-busting rates in the region of 5%.

Katie has a background in investment writing and is interested in everything to do with personal finance, politics, and investing. She enjoys translating complex topics into easy-to-understand stories to help people make the most of their money.

Katie believes investing shouldn’t be complicated, and that demystifying it can help normal people improve their lives.

Before joining the MoneyWeek team, Katie worked as an investment writer at Invesco, a global asset management firm. She joined the company as a graduate in 2019. While there, she wrote about the global economy, bond markets, alternative investments and UK equities.

Katie loves writing and studied English at the University of Cambridge. Outside of work, she enjoys going to the theatre, reading novels, travelling and trying new restaurants with friends.