The Bank of England was likely to hold interest rates before labour market data was released on Tuesday. The new wage growth figures — which show continued robust pay growth — cement a decision to hold in our view. A deeper analysis of labour market data, which shows a clearly cooling labour market, suggests that rate-setters may have to ditch their “gradual” approach to easing in the new year. Policymakers at the BoE pay special attention to wage growth figures.
Ongoing strong pay rises suggest to them that inflation is more persistent, requiring restrictive rates for longer. Official UK labour market data released on Tuesday shows wage growth remains far above a level — given meagre productivity growth — that is consistent with 2 per cent annual inflation. Private sector regular pay — our preferred gauge from the ONS monthly wages and salaries survey — grew at an annual rate of 5.4 per cent in October, while median pay from HMRC tax data grew at a rate of 6.3 per cent in November, down from nearly 8 per cent in October. Alternative, unofficial wage data from Indeed also shows continued strong growth — 6.7 per cent in the year to October. At worst, this pay data could mean that the BoE’s Monetary Policy Committee concludes the UK economy is tracking its third scenario in which high inflation remains persistent and requires high interest rates for a long time. While wage growth is clearly too high for the MPC to justify a second consecutive cut this week, other data on the labour market shows clear cooling. Before this release, we had noted weak UK labour market trends, with job vacancies cooling and total employment — based on reliable HMRC tax data — falling in the past three months. The decline in payrolls continued in November, with payroll declining in November relative to October by 35,000, taking total employment below March level
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