The latest data from the Office for National Statistics (ONS) has revealed a sharp rise in UK pay growth, reaching 5.2% in the three months to October. This unexpected acceleration, largely driven by stronger wage growth in the private sector, comes at a time of increasing economic uncertainty. While rising wages are good news for workers—particularly as inflation remains subdued—concerns are mounting about the health of the broader job market, with recruitment slowing and vacancies falling.
For the Bank of England, tasked with balancing economic growth and inflation control, the data adds a new layer of complexity. Calls for an interest rate cut to boost the economy are growing, yet the strength of wage growth may force policymakers to hold firm for now. As the labour market shows signs of softening, questions arise about whether these wage gains can be sustained—and what impact they will have on future monetary policy decisions.
Private Sector Wages Drive the Growth
The rise in pay growth to 5.2%, both with and without bonuses, reflects stronger wage momentum in the private sector, where annual earnings increased by 5.4%. In contrast, public sector pay growth stood at 4.3%, widening the gap between the two. This divergence can be attributed to various factors, including rising wages for skilled workers in manufacturing.
Liz McKeown, director of economic statistics at the ONS, explained:
“After slowing steadily for over a year, growth in pay excluding bonuses increased slightly in the latest period, driven by stronger growth in private sector pay.
“Pay growth including bonuses increased by more, but this reflects previous figures being affected by the one-off payments made to some public sector employees in 2023.”
The uptick in wages for factory workers, reaching an impressive 6%, has been a major contributor to this overall growth. However, while workers benefit from stronger pay packets, concerns are rising among businesses facing higher labour costs.
Real Wage Gains Offer Temporary Relief
The combination of rising wages and low inflation means workers are experiencing tangible improvements in their real incomes. Real wage growth—adjusted for inflation—climbed by 2.2% over the past year, marking a rare period of positive income gains after years of stagnation.
Monica George Michail, economist at the National Institute of Economic and Social Research, highlighted the significance of these gains but warned of future moderation:
“The combination of high average pay growth and low inflation meant most workers were enjoying significant real income gains.
“However, given the slowdown in recruitment activity and rising unemployment, we expect wage growth to slow in the coming months, although the rise in national living wage in April would exert some upward pressure.
“We expect the Bank of England to gradually cut rates in 2025 as wage growth moderates and inflation stabilises.”
While real wage growth offers short-term relief for households, a backdrop of declining job vacancies and rising unemployment suggests a more subdued outlook for wage increases in the near term.
Job Market Weakens Despite Wage Growth
The strength in wage growth comes at a time when the labour market shows clear signs of softening. Early estimates for November reveal a fall of 35,000 employees, following a modest rise in October. Job vacancies have also dropped by 33,000 over the last three months, reaching 818,000—a level still higher than pre-pandemic figures but continuing a downward trend.
Several factors contribute to this slowdown:
- Employers are holding back on recruitment amid economic uncertainty.
- Rising costs, including higher national insurance contributions and an expected increase in the national living wage, are pressuring businesses.
- Firms are delaying investments to focus on cost management.
Industry groups, such as the British Chambers of Commerce, have voiced concerns about businesses’ ability to absorb these rising costs. Many employers are now making difficult choices, including pausing recruitment and increasing prices to offset expenses.
Interest Rates Likely to Hold as Policymakers Tread Carefully
The unexpected strength in pay growth has altered expectations for the Bank of England’s next steps on interest rates. Financial markets, which had previously anticipated a gradual easing of rates, have adjusted their forecasts following the latest ONS data.
The probability of an immediate rate cut has dropped sharply, with markets now assigning just a 7% chance of a reduction in rates during this week’s meeting. For now, the Bank’s benchmark interest rate remains at 4.75%, with gradual declines anticipated over the course of 2025, potentially settling around 4.1% by December next year.
Policymakers face a delicate balance. Cutting rates too soon risks fuelling further inflation, particularly if businesses pass on higher labour costs to consumers. Delaying cuts, however, could stifle growth and place further strain on the labour market.
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