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UK businesses reported easing wage growth expectations in February, according to a closely watched survey by the Bank of England that will support hopes of interest rate cuts later this year.
Wages are forecast to rise by 4.9 per cent on average over the next 12 months, down from an anticipated 5.1 per cent increase in January, the BoE’s monthly survey of chief financial officers found. This was the first time since May 2022 that the figure had dropped below 5 per cent.
The outlook for pay is a key indicator for labour-intensive services inflation that has remained stickier than overall price growth. Headline inflation in January was 4 per cent, unchanged from December, and well below its 42-year peak in October 2022 of 11.1 per cent, according to official data. But services inflation actually rose slightly to 6.5 per cent from 6.4 per cent the previous month.
Tomasz Wieladek, chief European economist at the investment manager T Rowe Price, said the latest BoE data was “encouraging” and was closely watched by rate-setters. “The fact that wage inflation expectations finally fell below 5 per cent is an important threshold for the Monetary Policy Committee.”
On the three-month average, wage growth expectations were stuck at 5.2 per cent, according to the survey.
The latest data comes a day after the Office for Budget Responsibility said it expected headline inflation to fall below 2 per cent in the coming months, and remain below the central bank’s target until 2027. The UK fiscal watchdog forecast nominal average wage growth would halve in 2024 from the 30-year high of just under 7 per cent last year as the labour market loosens.
Economists said the BoE would want to see more signs of wage growth easing before cutting interest rates. James Smith, economist at ING, said he expected services inflation and wage growth to “gradually head lower into the summer”. But he cautioned rate-setters would want to see April and May’s consumer price data before looking to cut rates because they “won’t want to second guess” the fall in services inflation.
Paul Dales, economist at Capital Economics, agreed. “The bank will probably want to see it easing a bit more significantly and in a bit more on a sustained basis”, before starting to cut interest rates, he said.
The BoE survey also showed that businesses expect prices to rise by 4.1 per cent over the coming year — the lowest rate since September 2021 — down from the 4.5 per cent forecast in January. Employment growth expectations also weakened to 1.4 per cent, down from 1.8 per cent the previous month.
Source: Economy - ft.com