UK wage growth hits a six-month high, but expectations for a Bank of England rate cut rise

According to Zhitong Finance APP, despite a decline in employment numbers in the UK in the weeks following the Labour Party's first budget increase in payroll taxes, the UK's wage growth unexpectedly rose to its highest point in six months. The UK's Office for National Statistics stated on Tuesday that in the three months ending in November, wages excluding bonuses increased by 5.6% year-on-year, up from 5.2% the previous month. This figure is slightly above the 5.5% increase that economists generally expected, but some analysts pointed out that strong underlying data effects have inflated this number.

The economic indicator most closely watched by the Bank of England—the wage growth in the private sector—accelerated from 5.5% to 6%. However, there are significant signals indicating that the UK labor market has shown further signs of loosening following the latest budget announcement by Chancellor of the Exchequer Rachel Reeves in October.

Data based on UK tax records shows that after a reduction of 47,000 jobs in December, the number of employed people in the UK has fallen to its lowest level in over a year. This marks two consecutive months of decline, raising concerns that the £26 billion (approximately $31.9 billion) increase in employer national insurance proposed by the ruling Labour Party is leading to significant layoffs by businesses.

Since the Labour Party's budget announcement, UK employers have laid off 79,000 people.

Another sign of weak economic activity is that the number of job vacancies in the UK fell by 24,000 quarter-on-quarter to 812,000 in the three months ending last December, marking a decline for 30 consecutive months. In the three months ending last November, the unemployment rate also rose slightly from 4.3% in the three months ending last October to 4.4%. However, Bank of England officials are cautious about the accuracy of the UK's unemployment data.

Following the release of the latest wage data, the pound has narrowed its decline against the dollar, falling 0.4% to $1.2284, influenced by the overall movement of the dollar. Meanwhile, traders slightly raised their expectations for the number of interest rate cuts by the Bank of England this year after the wage data was released, which aligns with the expectations for other major central banks like the Federal Reserve in the interest rate futures market. The market is currently pricing in about 63 basis points of rate cuts by the Bank of England, which implies two cuts of 25 basis points, with the possibility of a third cut exceeding 50%.

The timing of these data releases comes just over two weeks before the Bank of England decides whether to continue cutting rates, and the state of the labor market is crucial to the Bank of England's rate cut decision. Since August, concerns over persistent inflationary pressures have prompted the Bank of England to ease monetary policy only twice, causing it to lag behind its counterparts in the Eurozone and the US.

As wage growth continues to outpace price increases, UK households have seen inflation-adjusted wage growth reach its highest level since August 2021. In the three months ending in November, real wage growth rebounded to 3.4% Bank of England Governor Andrew Bailey hinted at taking "cautious" further easing measures. However, central bank officials have taken a low-key attitude towards the recent rise in wage growth, citing surveys that show the UK labor market is cooling due to economic weakness.

Strong wage growth in the UK masks signs of significant easing in labor market pressures

"Given the resistance in the labor market, the rise in wage growth is expected to be very short-lived," said Yael Selfin, Chief Economist for the UK market at KPMG. She pointed out the rising unemployment rate and stated that the increase in wage growth is "mainly influenced by base effects." "Against the macro backdrop of slowing labor market activity, we expect wage growth to trend downward over the next year."

Some analysts believe that the latest domestic wage data in the UK has been significantly boosted due to relatively strong year-on-year wage growth in September and October of last year. The labor market statistics for November alone clearly show a slowdown in wage growth.

The latest labor market data also revealed that the number of non-employed individuals (i.e., those unemployed and not seeking work) decreased by 54,000 to 9.3 million. However, the number of long-term sick individuals increased by 21,000 to 2.8 million. Nevertheless, the Office for National Statistics stated that these data should be treated with caution due to the current dataset being not entirely reliable