Wage growth slows again – will interest rates fall in November?

Wage growth has eased again to the slowest rate in over two years, ramping up the chances of an interest rate cut when the Bank of England next meets in November. 

Regular wages grew by 4.9% on an annual basis between June and August, according to the Office for National Statistics (ONS). This is the slowest rate of growth since April-June 2022. 

Total wages (including bonuses) grew by a lower amount at 3.8%, however this is partly due to base effects after NHS and civil service workers received one-off bonus payments last summer. 

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While regular wages are still growing at more than double the rate of inflation (2.2%), the latest report is another step in the right direction. Both regular and total earnings are down 0.2% compared to the previous wage growth report. 

Wages are a big driver of inflation and the Bank of England wants to see evidence that domestic inflationary pressures are in the rear-view mirror before delivering another interest rate cut. 

Those hoping for a November cut may be concerned that the latest unemployment figures complicate the picture. However, challenges with the data mean the Bank of England is unlikely to give them much credence. 

The unemployment rate dropped to 4% between June and August, down from 4.1% in the previous report. Under normal circumstances, this could indicate some residual tightness in the labour market. 

However, the ONS warns that the Labour Force Survey has been affected by “increased volatility resulting from smaller achieved sample sizes”. As a result, it says any estimates should be treated with “additional caution”. 

The statistics body adds that alternative data sources may indicate that unemployment has fallen by “less than the Labour Force Survey has recently suggested”. 

Commenting on the latest labour market data, Kyle Chapman, FX markets analyst at Ballinger Group, says: “The headline here is that the trend in the labour market is still going in the right direction for 2% inflation, and that should support a steady stream of rate cuts from the Bank of England. 

“Labour demand is cooling off and that is returning some slack to the market, which is bringing down wage growth, and that should filter through into the all-important services inflation figure over the coming months.”

Will the Bank of England cut interest rates in November?

Households and businesses paying off mortgages and debts are desperately hoping for further interest rate cuts this year. The Monetary Policy Committee (MPC) is next due to meet on 7 November.

The Bank of England reduced rates from 5.25% to 5% on 1 August, but held them steady in September after indicating it would tread a cautious path ahead. The Bank wants to see further signs of inflation cooling and, in its statement last month, it said there had been few material changes between the August and September meetings. 

Despite this, the MPC could now be gearing itself up for a shift in approach. Earlier this month, governor Andrew Bailey told The Guardian that UK policymakers could become a “bit more aggressive” in their approach if inflation continues to cool. 

Wage growth is an important indicator to watch when assessing the outlook for rates, as there have been lingering fears that higher wages could be passed on in the form of higher prices for goods and services. 

Services inflation is another important metric for the Bank of England, as the sector accounts for around 80% of UK economic output. While international pressures (such as energy prices) have fallen significantly from crisis levels, services inflation has proved stickier and is still high at 5.6%.

“With inflation falling, the pressure on bosses to up wage packets has lessened and as those nine rate setters consider whether to cut interest rates next month, the further slowing of wage growth is likely to be a check in the cut column,” says Danni Hewson, head of financial analysis at AJ Bell. 

Despite this, Hewson adds that there is still “plenty more data to dig through between now and the Bank of England’s decision, with the Budget undoubtedly one of the biggest X-factors”. 

Tomorrow’s inflation reading will also be instrumental in dictating the fortunes of a November interest rate cut. MoneyWeek will be reporting live on the latest Consumer Prices Index (CPI) report when it is released at 07:00.