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UK pay is rising, but Bank of England is still expected to cut interest rates

UK private sector wages rose in November by almost double the pre-pandemic rate – 6.5% compared with 3.8% – and yet the Bank of England is expected to consider the outlook for employment to be weak enough in the coming months to justify interest rate cuts.

The Bank’s monetary policy committee (MPC) meets next month to judge the health of the economy and whether interest rates at 5.25% are too much of a dead weight on households and companies.

It is a strange situation for the central bank to find itself in. The Federal Reserve is under similar pressure to cut borrowing costs in the US, but that might seem more understandable in a country where wage growth has tumbled. The same situation applies to the continent, where the European Central Bank has never had a UK-style increase in wages.

Adding to the confusion is the huge variation in pay across various sectors. This is especially true in the private sector, which is most closely watched by the Bank as a barometer of the economy’s health.

Average weekly earnings, including bonuses across the hospitality sector, including restaurants, hotels and bars, have risen 19.6% since January 2020, from £368 a week to £440, while inflation has grown by 21.7%. Meanwhile, wages have jumped from £699 a week in the financial and business services sector to £901 a week – a 29% increase since January 2020.

Both sectors experienced wage growth of 7% or more in November, while construction workers were held to just 4.5%.

The Bank of England believes annual wage rises should be about 3% to maintain a steady rate of inflation at 2%. Any higher wages would put pressure on prices and push inflation up again.

So, asking why the Bank would consider cutting borrowing costs this year is legitimate. Surely, the wage data reflects a high demand for workers, which shows the economy is running too hot and needs to be calmed down with higher, not lower, interest rates.

Until recently, three members of the nine-strong MPC voted for higher borrowing costs at the December meeting, while their colleagues voted for a freeze.

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