Stubborn wage growth boosts likelihood of UK interest rate rise

The UK unemployment rate rose to 4.3%, in line with expectations, as the rise in interest rates continued to eat away at the UK economy.

The rate rose from 4.2% in the three months to June and was in line with FXStreet-cited market consensus.

But the data also showed growth in regular pay (excluding bonuses) was 7.8% in May to July, the same as the previous 3-month period and is the highest regular annual growth rate since comparable records began in 2001.

Annual growth in employees’ average total pay (including bonuses) was 8.5%, meaning in real terms, taking into account inflation, total pay rose on the year rose by 1.2%.

July’s figures were higher than FXStreet-cited consensus, which had expected an unchanged reading from 8.2% in the previous three-month period.

This total growth rate is affected by the NHS and civil service one-off payments made in June and July, the ONS said.

Samuel Tombs at Pantheon Macroeconomics said: “The persistence of excessively vigorous wage growth in July probably means the MPC can’t stop raising Bank Rate at this month’s meeting, but the end of the tightening cycle is not far off now.”

“Labour market slack, however, is continuing to increase at a faster rate than the MPC’s expected last month’s Monetary Policy Report, consistent with wage growth slowing markedly towards the end of this year,” he felt.

“We still expect wage increases to slow soon, averaging 0.4% per month in the second half of this year, and for the MPC to hike Bank Rate by 25bp this month and then calls it quits, leaving it at 5.50% until starting to reduce it from Q2 2024 onwards.”

But ING said “drill down and if you strip out the public sector, private sector pay barely increased in level terms between June and July.”

“And if we look at the alternative wage data which is based on payroll figures (or PAYE), that actually fell in level terms for the second consecutive month,” it pointed out.