UK wage growth fell in the three months to September, buoying hopes of another interest rate cut from the Bank of England.
According to the latest data from the Office for National Statistics (ONS), average earnings eased back to 4.8%, down from 4.9% in the previous three months.
The drop continues a trend of slowing pay growth that has been in motion for almost a year, and is another sign that the economy is starting to normalise after several years of high inflation.
Sign up to Money Morning
Don’t miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don’t miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Liz McKeown, ONS director of economic statistics, said: “Growth in pay excluding bonuses eased again this month to its lowest rate in over two years.”
Wage growth is a big driver of inflation, which means the Bank of England watches the metric closely when setting interest rates.
The ONS data also showed that unemployment in the UK increased to 4.3% in the three months to September, a rise on the 4% reported for the three months to August.
The Bank of England meets several times a year to set the base rate, a mechanism that influences interest rates on everything from mortgages to savings accounts.
Until recently, the Monetary Policy Committee (MPC) was holding interest rates at a 16-year high in a bid to combat inflation. On 1 August, it finally voted to reduce the base rate to 5% after making significant progress with inflation. A second cut followed on 7 November, taking the base rate to 4.75%.
When might interest rates fall further?
Although the fall in wage growth is helpful in the move to cut rates, another rate reduction in December when the MPC next meets looks unlikely, based on market expectations. This means interest rates will probably end the year at 4.75%.
Market participants have dialled down their bets after watching the Budget play out. Chancellor Rachel Reeves announced £70bn in spending policies – an attempt to boost investment in the UK economy and prevent department cuts.
“The increases in government spending and investment announced in the Budget are taking place at a time when the economy is already operating close to capacity,” says Paul Dales, chief UK economist at the consultancy Capital Economics.
“In that situation, the faster rates of GDP growth we expect in light of the Budget will probably spill over into larger rises in prices than we previously thought,” he told MoneyWeek.
The team at Capital Economics was previously expecting inflation to average out at 2.6% in 2025 and 2% in 2026. They have now adjusted their inflation forecasts upwards slightly to 2.8% and 2.1% respectively.
Reeves also unveiled £40bn in tax hikes in her fiscal statement, with a large part of this coming from an increase to employer National Insurance contributions. Commentators have said this could contribute to higher inflation if businesses pass the costs on to consumers by putting their prices up.
The National Living Wage is also set to rise by 6.7% from April. This is good news for employees but will contribute to rising costs for some businesses. It could also contribute towards wage growth staying high. Wage growth is another driver of inflation.
Even before the Budget, onlookers were expecting less positive inflation figures towards the end of the year. In the latest poll from news agency Reuters, almost two-thirds of economists (46 out of 72) said they expect rates to be kept on hold at the meeting in December.
