Bank of England takes a tough decision on interest rate due to strong wage growth

According to official data released Tuesday, the UK labour market is starting to relax, although wage growth hasn’t slowed down as much as economists had expected.

Figuresfrom Office for National Statistics show that average wages, excluding bonuses in the private sector were 6.9 percent higher in the quarter ending February compared to a year ago. This is down from 7.3 percent growth in the fourth quarter of 2022.

The public sector’s wage growth lagged behind the private sector, but only by a small margin. Average wages without bonuses were up 5.3% on the previous year.

When the Monetary Policy Committee of the Bank of England meets next on May 11, the data will allow it to make a well-balanced decision about whether to increase interest rates from the 15-year high of 4,25 per cent or keep them the same for the first 18 months.

The slower than expected wage growth was due to revised January figures, and an acceleration of pay in February.

Victoria Clarke of Santander CIB said that Tuesday’s figures “did not provide the reassurance MPC may be seeking” in terms of a moderated wage growth rate consistent with the 2 percent inflation target.

Modupe Adegbembo is an economist with Axa Investment Managers. He said that the new strength of wages will “unsettle MPC and add to fears of a greater persistence in inflation”.

Other developments suggest that the shortage of labour which has driven wage increases is beginning to ease.

The unemployment rate increased to 3.8 percent from 3.7 percent in the previous quarter. The number of job vacancies decreased for the ninth consecutive month, and the number people who chose not to work or look for a new job dropped as more students entered the workforce.

The Employment Rate increased by 0.2 percentage point from the previous period of three months to 75.8 percent.

The majority of growth in employment was due to part-time and self-employment, rather than new jobs created by employers. Samuel Tombs of Pantheon Macroeconomics said that this shows the labour market is “not as hot as employment figures suggest”. He added that the revised wage growth data showed there was an even chance for the MPC to leave rates unchanged or raise them by 25 basis point.

The UK workforce is still smaller than before the Covid-19 Pandemic, despite the increase in employment. The number of economically-inactive people in working age is still over 400,000 more than it was before the Covid-19 pandemic. Almost all of this increase comes from people who claim to be unable to work due a long-term illness.

Tony Wilson, Director of the Institute for Employment Studies (a research consultancy), said that progress in boosting the number people employed after the pandemic had been “painfully slowly” and it was “clearer now than ever before that we are falling behind other major economies”.

Neil Carberry, the head of the Recruitment & Employment Confederation (REC), described the lack of workers as the “defining feature of our labor market at the moment”. He said that the situation is “not as volatile” as it was in 2022 and that pay has “increased strongly”. . . But not at a pace that would cause inflation to increase”.

Jane Gratton is the head of people policy for the British Chambers of Commerce. She said that vacancies were “a drag anchor” on businesses, preventing them to fulfill orders and take on new work. She urged ministers to quickly implement their promise to expand free childcare, and to be ‘pragmatic’ about expanding the list of shortage professions for which immigration restrictions are relaxed.

Guy Opperman, the Employment Minister, said that the government is boosting childcare and training to “breakdown barriers for people who are out of work”, as well as increasing the minimum wage.

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