High pay awards likely to keep UK interest rates higher for longer

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UK pay deals are running at levels that will incline the Bank of England to keep interest rates high for longer than other central banks, as employers prepare for a big rise in the wage floor in the new year.   

Two sets of data released on Wednesday show there has been no change in the generosity of recent pay awards by large employers as the main wage bargaining season approaches. Meanwhile, they expect to make only slightly lower awards in 2024.

Figures published by the research group XpertHR showed that the median basic pay award remained steady at 6 per cent in the three months to November — a level not sustained for more than 30 years.

A second research group, IDR, published the findings of a poll showing that a quarter of large, private sector employers expect their main pay rise for staff in 2024 will be at least 5 per cent, with almost half planning to award pay increases between 4 per cent and 4.99 per cent.

Younger workers are set to benefit from a bumper increase in the UK’s minimum wage. The main hourly rate for adults is set to rise by 9.8 per cent next April but analysis by the Resolution Foundation think-tank, published on Wednesday, highlights the large numbers who will receive a 15 per cent rise for 18- 20-year-olds and a 21 per cent boost for 16- to 17-year-olds.

The figures show the extent to which pay pressures are still bubbling in the UK economy, even as inflation starts to fall and stagnating output makes companies less eager to hire.

This is the main reason why BoE rate-setters took a more hawkish line than their European and US counterparts last week, making it clear they needed to see more evidence of inflationary pressures easing before they could consider cutting interest rates from their 16-year high of 5.25 per cent.

Ben Broadbent, a BoE deputy governor, said on Monday that while wage growth had fallen from a summer peak of 8.5 per cent on official measures, contradictory data meant the central bank would want to see a “more protracted and clearer decline” before concluding things were on a downward path.

Sarah Breeden, the newest member of the BoE’s Monetary Policy Committee, took a similar line in a speech on Tuesday, saying that on most measures wage growth was “several percentage points” above the level consistent with 2 per cent inflation, given the current weakness in UK productivity growth.

Official data points to a sharp recent slowdown in private sector pay growth, offset by bumper pay awards in the public sector. Breedon said she would be alert to any signs “that the loosening in the labour market is accelerating, and wage growth is falling more sharply than expected”.

But there was little sign of that in the figures published on Wednesday.

Sheila Attwood, content manager at XpertHR, said that despite a deteriorating economy and loosening labour market, employers had “indicated that there may only be a small drop-off” in pay awards in 2024, with the “going rate” likely to edge down to about 5 per cent.

“Although the coming trend in pay awards is likely to be down on the past year, on the whole they are likely to remain higher than they were prior to 2023,” said Zoe Woolacott, a senior researcher at IDR.

While affordability was employers’ main concern while setting pay, four-fifths told IDR that pressure to offer competitive salaries was a critical factor, with a significant minority affected by the rising minimum wage.  

The surveys are important because official pay data has been unusually volatile in recent months, and alternatives, such as the Recruitment & Employment Confederation’s monthly survey, reflect the salaries offered to new hires rather than basic pay awards for people staying in their jobs.

Some of the biggest recent pay awards have been in the public sector — including a 6.5 per cent increase for schoolteachers and a 7 per cent rise for police officers. Ongoing strike action by junior doctors, and the threat of strikes elsewhere, could boost pay further in coming months.  

Jennifer McKeown, chief global economist at consultancy Capital Economics, said unions had recently secured double-digit pay deals in many advanced economies — benefiting US actors and auto workers, Italian metal workers, German public sector workers and Canadian port workers.   

But in most cases, these increases would be spread over several years, with the biggest gains coming up front and smaller increases pencilled in for the future.

However, “the UK is possibly an exception”, McKeown said. She noted that pay deals were not only still “worryingly high” but were also negotiated for one year only.

Because of this, she added, “we cannot draw the same comfort about the future pace of pay growth that we can for several other advanced economies”.