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Resilient wage growth gives BoE new grounds for caution on rate cuts

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UK wage growth eased by less than expected in the three months to December, according to official data that will leave the Bank of England still looking for confirmation that inflation is falling.

The annual pace of growth in average weekly earnings, including bonuses, slowed to 5.8 per cent over the period, the Office for National Statistics said on Tuesday.

The figure was down from a summer peak of 8.5 per cent and from 6.7 per cent in the three months to November, but the slowdown was less than analysts or the central bank had predicted.

Hugh Gimber, global market strategist at JPMorgan Asset Management, said that while it was good news for consumers that wage growth was now comfortably outpacing inflation, the BoE would view the data “through a different lens”, with “significantly more evidence of cooling likely required” before it would consider cutting rates.

Annual growth in earnings excluding bonuses slowed to 6.2 per cent, compared with 6.7 per cent in the three months to November.

Rate-setters are watching wages closely because they believe it will be harder to return inflation to the 2 per cent target if pay rises rapidly and companies pass higher costs on to consumers. In December, inflation stood at 4 per cent.

Investors pushed back bets on BoE rate cuts on Tuesday morning, and were placing a 60 per cent probability on the UK’s first quarter-point interest rate cut being delivered in June — down from a 75 per cent chance before the data’s release. Sterling nudged 0.17 per cent higher to $1.2647.

Investors were reacting partly to the wage figures and partly to a new ONS estimate of unemployment. This suggested the jobless rate fell to 3.8 per cent in the last months of 2023, below its pre-pandemic rate and unchanged on the year.

However, the data is based on an unreliable survey and conflicts with other recent labour market surveys.

Samuel Tombs, an analyst at the consultancy Pantheon Macroeconomics, said that while the official figures suggested the labour market remained tight, “their veracity remains questionable”.

Thomas Pugh, economist at the audit firm RSM UK, said the new unemployment figure “should not lead to a significant delay to the first cut in interest rates”, as the BoE would put more weight on evidence that pay growth continued to slow.

The ONS, which has struggled to produce its usual workforce data in recent months because of problems with the survey underpinning it, said a range of indicators pointed to the jobs market softening in the past year.

The number of payrolled employees grew by just over 400,000 in the past year but the rate of increase has slowed, with numbers barely changed in December.

Total vacancies have declined steadily and the number of people claiming out of work benefits was 61,000 higher in January than a year earlier, at just over 1.5mn.

“It is clear that growth in employment has slowed over the past year,” said Liz McKeown, ONS director of economic statistics. “Over the same period, the proportion of people neither working nor looking for work has risen, with historically high numbers . . . saying they are long-term sick.”

The ONS resumed publication of figures based on its labour force survey but warned that they should be treated with “additional caution” because they were based on a smaller sample size than usual.

Meanwhile, the employment rate was up on the quarter at 75 per cent but down on the year because more people were neither in work nor job-seeking, many owing to ill health, and so classed as economically inactive.

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