Slower April wage growth to feed into interest rate cut hopes
An expected drop in wage growth in April compared to the previous month could encourage Bank of England officials to vote for further interest rate cuts this year, leading analysts have suggested.
Labour market data for April, which is due to be published on Tuesday morning, is set to reveal wage growth has cooled while employment has continued to fall.
A Bloomberg poll of economists believe wage growth excluding bonuses will be 5.5 per cent in April, compared to 5.6 per cent in March.
Forecasters have also suggested the unemployment rate could rise to 4.6 per cent in fresh Office for National Statistics (ONS) figures, which would signal increasing numbers of redundancies and spark fears that the UK economy is heading for a downturn.
Oxford Economics’ Andrew Goodwin and Edward Allenby have suggested that wage data will be a “key influence” on whether Bank policymakers opt to cut interest rates again in August, which would be consistent with market expectations.
Pantheon Macroeconomics analysts said lower pay growth will be “food for the doves” and lead to market predictions over two interest rate cuts this year holding steady.
The economics consultancies believe members on the Monetary Policy Committee (MPC) will agree to hold interest rates at 4.25 per cent in a decision later this month.
Interest rate cuts hinge on second-round effects
Governor Andrew Bailey last week told the Treasury Select Committee that it was crucial “wage growth” cooled before the MPC could rally behind interest rate cuts.
His comments echo those made by other rate-setters, including deputy governor Clare Lombardelli and Megan Greene, who recently warned second-round effects, where a loop of high inflation pushes pay higher, could stall a reduction in price growth.
“The last time we had a lot of second-round effects — we’re hoping that we won’t have second-round effects this time around, but we’re not sanguine about it,” she said on Saturday at an event in Croatia.
Many economists will look at new labour market data cautiously given recent problems at the Office for National Statistics (ONS) with calculations, particularly after it found an error in its April inflation data.
Bank of England economist Huw Pill, who voted for interest rates to be held at the last meeting in early May, has previously criticised the ONS over its handling of jobs data.