Hopes of an early interest rate cut have been dampened as stubbornly high wage growth is predicted to see the Bank of England keep borrowing costs at punishing levels today – even as ‘cracks form’ among decision-makers.
In a blow to businesses and homeowners hoping for relief, official figures show that wages are still rising at a blistering pace, piling pressure on the economy and putting pressure on the Bank to hold rates at 4.5% – at least for now.
The latest data from the Office for National Statistics (ONS) reveals that annual wage growth, excluding bonuses, remains at 5.9%, while including bonuses, it stands at 5.8%—well above the Bank’s 2% inflation target.
With inflation hovering at 3% and expected to edge higher, policymakers are expected to refuse to budge on rates for fear of igniting another inflationary spiral.
Andrew Bailey, the Bank of England’s governor, has warned that rising wages risk fuelling persistent inflation, leaving the Monetary Policy Committee (MPC) in a tight spot.
While the economy is teetering on the brink of stagnation, the Bank remains wary of cutting rates too soon.
Many in the business and finance sectors had been lobbying for at least a quarter-point cut to stave off economic decline, but their pleas are likely to be ignored.
Instead, the Bank is expected to take a cautious approach, with some suggesting no cuts are likely until the summer.
Figures published by the ONS today paint a mixed picture of the UK jobs market. While payroll employment barely moved between December and January—rising by just 9,000—provisional figures for February suggest a small uptick of 21,000 jobs.
Unemployment remains steady at 4.4%, but ongoing problems with data collection mean the true picture is unclear.
Ruth Gregory of Capital Economics said: “With the labour market cooling rather than collapsing and wage growth stuck in the 5.5%-6.0% range, we doubt the Bank of England will cut interest rates today.”
Matt Swannell, Chief Economic Advisor to the EY ITEM Club, echoed this sentiment, stating: “Having accelerated in the final quarter of last year, pay growth has stabilised. Earnings growth remains well clear of the rates consistent with inflation returning to the 2% target on a sustainable basis. Momentum in pay growth remains strong.”
He added: “The labour market data will likely reinforce the MPC’s caution. We expect the Committee will continue to adjust policy slowly, leaving Bank Rate unchanged later today, as it gathers more information on how changes in the National Living Wage, employers’ National Insurance Contributions (NICs), and international trade policy feed through to the jobs market and inflation.”
The decision to what the Bank of England should do on interest rates has sparked fierce debate among economists and traders.
Harry Mills of Oku Markets insists the Bank should cut immediately, warning: “January saw a contraction in UK GDP, and the quarterly numbers point to a stalling economy. The April tax rises will be bad for business and bad for the economy. The Bank needs to act now.”
Tony Redondo of Cosmos Currency Exchange disagrees, predicting: “The MPC loves a slow dance, so they won’t cut today. The data’s not screaming for it. Should they? If they prioritised growth over inflation, maybe—but inflation hawks are in control.”
Meanwhile, Gabriel McKeown, Head of Macroeconomics at Sad Rabbit told Newspage that the Bank is walking a tightrope: “Bailey is balancing inflation control with the need to support a sluggish economy. A rate cut is not on the cards today, but cracks are forming within the MPC.”
Ben Perks, Managing Director at Orchard Financial Advisers, said: “Each day, borrowers are coming to the end of ultra-low fixed rate deals. The MPC could help them by cutting rates today, but instead, they’re prioritising their farcical need to hit a 2% inflation target.”
Elliott Culley, Director at Switch Mortgage Finance, added: “The economy is flagging, but inflation is rising. The Bank of England sees inflation as the key concern, meaning a cautious approach will be followed.”
