UK wage growth slows more than expected, reinforcing the central bank's cautious stance on interest rate cuts

According to the Zhitong Finance APP, the cooling of wage growth in the UK was less than expected, reinforcing the Bank of England's cautious stance on faster interest rate cuts. The UK's Office for National Statistics stated on Tuesday that in the three months to September, average earnings excluding bonuses rose by 4.8% year-on-year, slightly below the previous 4.9%. Although this figure is the lowest since mid-2022, economists had previously anticipated a larger decline to 4.7%. This data supports the Bank of England's cautious attitude following its second interest rate cut of the year last week. With potential price pressures still brewing, the Monetary Policy Committee has signaled that it is not in a hurry to cut rates further, prompting traders to fully digest expectations of only two rate cuts of 25 basis points over the next 12 months. The indicator most closely watched by the Bank of England—the regular pay growth in the private sector—remained unchanged at 4.8%, consistent with the Bank's own expectations. Officials believe that wage growth remains too high to be consistent with the 2% inflation target. Paul Dales, Chief UK Economist at Capital Economics, stated: "There is little evidence to suggest that the Bank of England needs to worry about a loosening labor market and an impending slowdown in basic wage growth." The slowdown in fixed wages in the private sector over the past year "indicates that the Bank of England will continue to cut rates gradually." The unemployment rate rose from 4% to 4.3%, a larger increase than expected; however, officials are cautious in interpreting the data due to issues with the response rate of the survey. Currently, Bank Governor Bailey and other officials are facing threats to their price stability mission from multiple fronts, including the possibility of a trade war following Trump's victory in the U.S. election. The first budget of the Labour government has also cast a shadow over price and wage prospects, as Chancellor Rachel Reeves announced increased public investment borrowing, a significant rise in the minimum wage, and a substantial increase in employers' national insurance contributions. Businesses may respond by passing on the hefty tax increases to workers through reduced wage growth, layoffs, or higher consumer prices. The Bank of England is uncertain how businesses will react but notes that, due to weak demand, the current room for passing on cost increases seems "limited." Ana Andrade and Dan Hanson from Bloomberg Economics stated: "The stickiness of private sector pay growth in September proves that the Bank of England's cautious easing policy is correct. With the recent budget further increasing the risks of price and wage-setting behavior, we believe the Bank will continue to cut rates at a pace of once per quarter over the next year." Although there is currently evidence that the labor market is further loosening, with more people exiting inactivity and re-entering the labor market, both employment and unemployment rates are rising. However, the Office for National Statistics (ONS) has warned that these figures are not entirely reliable due to issues with the labor force survey. Data from the ONS shows that the number of people neither in work nor looking for work has sharply decreased by 162,000, falling to 9.25 million, the lowest level in three months as of October 2023. This shift has led to an increase of 220,000 in employment numbers and an increase of 50,000 in unemployment numbers for the quarter. The decline in inactivity rates is attributed to a decrease in the number of students, as well as a reduction in those who claim to be out of work to care for their families. The number of long-term sick unemployed has decreased by 20,000, which is an issue the government is working to address. Approximately 2.78 million people are unable to work due to chronic illnesses, an increase of 670,000 compared to pre-pandemic levels. The latest labor market data also shows that household finances continue to be boosted by the recovery of real fixed wages, with inflation-adjusted earnings growing by 2.7%, although this is the lowest growth rate since the first quarter; job vacancies continue to decrease, indicating a easing in labor demand, with vacancies falling to 831,000 in the three months to October, still slightly above pre-pandemic levels; total wage growth, including bonuses, unexpectedly strengthened, rising from 3.9% to 4.3%. Although this is the first acceleration in six months, this figure has been boosted by one-off bonuses for civil servants