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Rise in wage growth has "priced out any chance of a 25bp Bank of England cut"

ended 17. December 2024

This morning, the ONS revealed that annual growth in employees' average regular earnings (excluding bonuses) was 5.2% in August to October 2024, up on the previous three-month period (4.9%). One trader says the GBP Overnight Indexed Swap has now priced out any chance of a 25bp Bank of England cut on Thursday. A forex expert added: “On top of the inflationary pressures yet to filter in from the Budget, this will further complicate the Bank of England's decision-making regarding interest rates." Meanwhile, a financial adviser said: ”Pay growth at 5.2% is a real spanner in the works for rate cuts". The views of experts are below.

6 responses from the Newspage community

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Tony Redondo
Founder at Cosmos Currency Exchange
This morning’s ONS report marks the first increase in over a year in employees' average regular earnings. On top of the inflationary pressures yet to filter in from the Budget, this will further complicate the Bank of England's decision-making regarding interest rates. This rise in pay growth should delay anticipated rate cuts or limit their extent, as it suggests persistent inflationary pressures within the economy. The combination of rising wages and the effects of the recent Autumn Budget, including increased National Insurance and the minimum wage, are expected to keep inflation elevated, prompting the Bank to adopt a cautious approach. Therefore, while there is pressure for rate cuts due to the economic contraction, the implications of rising pay on top of the Budget measures introduced by Chancellor Reeves could lead to a more restrained monetary policy moving forward. I expect the Bank to hold interest rates unchanged on Thursday and keep their options open in the new year.
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Scott Gallacher
Director at Rowley Turton
Pay growth at 5.2% is a real spanner in the works for rate cuts. Strong wage growth risks reigniting inflation, as firms may hike prices to offset rising pay pressures and higher costs, including the increase in employers' National Insurance. The Bank of England may stick to a "higher for longer" stance, delaying cuts until wage growth cools. Good news for savers enjoying higher returns, but bad news for borrowers hoping for relief.
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Ben Perks
Managing Director at Orchard Financial Advisers
Many of the wage increases over this period have been forced. The government have tied businesses' arms behind their backs. This certainly isn’t the result of booming businesses, mass promotions and widespread hiring.
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Anita Wright
Chartered Financial Planner at Ribble Wealth Management
While falling output typically provides justification for monetary easing to stimulate growth, the uptick in wage growth complicates matters, as it signals underlying inflationary pressures that the Bank of England cannot easily ignore. This could delay Threadneedle Street's decision to cut interest rates, as higher pay growth risks fuelling core inflation and undermining progress made on bringing it down. While some may anticipate a 0.25% cut in December as a pre-emptive measure, the Bank will likely adopt a cautious approach. It may opt to hold rates steady to assess the interplay between wage growth, inflation trends, and economic output in the coming months. Any cuts would therefore depend on clear signals of further disinflation and evidence that pay growth is cooling, which does not yet appear to be the case. Thus, in the short term, the Bank of England may remain on hold, with rate reductions possibly pushed further into 2025 unless economic conditions markedly deteriorate.
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David Stirling
Independent Financial Adviser at Mint Wealth
As widely predicted the chances of a rate cut this week from the Bank of England is miniscule. There are so many moving parts to consider including these latest employment figures that Threadneedle Street are most likely to stick rather than twist this week, which is a blow to borrowers holding out to book rates in the next month or so. The lenders don't need to follow the BoE base rate and can be competitive off the back of their swap rates though, so it's not all necessarily Scrooge time.
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David Belle
Founder and Trader at Fink Money
The GBP Overnight Indexed Swap has now priced out any chance of a 25bp Bank of England cut on Thursday. It was approximately 3% before the jobs data. This is a huge mispricing. For the market now to price out race cuts to this extent when business sentiment and hiring is on the floor tells me there is huge potential increases in the surprise factor of the Bank of England actually telling the market it is wrong. This would lead to a very sharp fall in sterling.