A Bank of England rate-setter warned that Britain was slipping into a recession as official data indicated signs of a weakening labour market.
Swati Dhingra said that there were “early indications” of a possible “over-tightening”, as borrowing costs rise.
She said that the labour market was loosening up, while speaking at an event of the Royal Economic Society.
The sharp increase in vacancies we saw after the pandemic already wiped out 80pc of it overshoot. It is difficult to see where wage growth will continue to grow.
Ms Dhingra called the rate cycle from 0.1pc up to 5.25pc “a very sharp tightening over a very brief period of time”.
She said: “A more modest path of interest rate for a longer time period would have been preferred because it would have allowed a much better balanced transmission to businesses and households, who wouldn’t experience the sharp peaks-and-troughs associated with increasing interest rates to very high levels.”
Ms Dhingra spoke as economists claimed that official data showing a slower growth in wages would fuel the hope the Bank of England had raised rates enough to weaken and ease , a key driver of inflation.
The Office for National Statistics reported that the average weekly earnings for the three-month period ending August increased by 8.1pc over the same time last year. This is a slowdown from the 8.5pc increase in the previous three-month period.
The economists had predicted an increase of 8.3pc.
Ashley Webb, Capital Economics, said: “Cooling labor market conditions seemed to have started feeding through in an easing of wage growth in August.” This supports our belief that interest rates are at their peak of 5.25pc.
He warned, however, that rates would remain high until 2024 due to the fact that wage growth will “only fall slowly”.
The Office for National Statistics released figures on Tuesday that showed the number of vacancies fell to the lowest level for more than two decades in the three-month period ending in September.
The tax data revealed a drop of 3% in the number paid employees for a third month running.
Real earnings have increased by 0.8pc after inflation, as wages are increasing faster than prices.
The increase is a significant acceleration of the 0.6pc in real terms that was recorded in July. This gives hope that the cost-of-living crisis has passed its worst.
New pay agreements brought about a 12.5pc increase in public sector pay, the largest ever recorded. Private sector earnings grew by 7.1pc.
Earnings across the workforce, excluding bonuses, were up 7.8pc over the past three months, or 0.7pc when inflation is taken into account.
The number of job openings has fallen to 988,000, the lowest since July 2021. This shows that employers are no longer as desperate as they were last year when more than a quarter million positions were advertised.
Yael selfin, chief economist of KPMG UK said that the shrinking job market “underscores an economic growth momentum that is waning”.
She stated: “While overall economic momentum is weak, an expected easing in inflation coupled with early pay awards and the increased national living wage should help improve consumers’ purchasing power, and alleviate pressure on households.”
Chancellor Jeremy Hunt stated: “It is good news that real wages are increasing and inflation is declining, so that people have more money to spend.” We must continue to stick to our plan of halving inflation to maintain this progress.
The yields on US Treasury bonds soared to their highest level in 17 years after the Federal Reserve decided to maintain higher interest rates for longer due to strong economic data.
The yield on US two-year Treasuries has reached its highest level since 2006, thanks to strong data from the US manufacturing sector and retail sales.