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UK wage growth comes in higher than expected

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UK wage growth was higher than expected in the three months to February, but a sharp rise in unemployment led traders to cement bets on the Bank of England cutting interest rates this year.

The Office for National Statistics said on Tuesday that average earnings, including bonuses, were 5.6 per cent higher over the period than a year earlier, the same annual growth rate as in the three months to January. Analysts had expected annual growth to slow to 5.5 per cent.

Excluding bonuses, annual earnings growth edged down from 6.1 per cent to 6 per cent, remaining stronger than the 5.8 per cent pace analysts had expected.

The figures suggest it could take time before Bank of England rate-setters are confident that inflationary pressures in the economy have eased enough to start cutting interest rates from their current 16-year high of 5.25 per cent. 

But the data also suggested that a softer jobs market could weaken workers’ bargaining power in the months ahead.

It showed a sharp increase in the jobless rate — which averaged 4.2 per cent in the three months to February, up 0.3 percentage points from the previous three-month period. The employment rate fell 0.5 percentage points to 74.5 per cent over the same period, while the share of working-age adults who were neither in work or job-seeking rose to 22.2 per cent.

The ONS has warned that short-term movements in jobs data may be volatile, because of problems with the survey underpinning the figures, but alternative indicators of employment — including tax records and claims for out-of-work benefits — also pointed to drop in the number of payrolled employees and more people falling out of work. 

Sterling weakened by 0.2 per cent against the dollar after the figures were released and traders in swaps markets moved to fully price in two quarter-point rate cuts from the BoE by the end of 2024, up from a 90 per cent probability before the data release.

Paul Dales, chief UK economist at the consultancy Capital Economics, said that without this “clear weakening in activity in the labour market, we’d be a bit worried that the UK’s disinflation process is grinding to a halt like in the US”. But he said the sharp fall in employment suggested wage growth would continue to ease in the coming months, allowing the BoE to cut interest rates from June even if the US Federal Reserve took longer to loosen policy.

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