91探花

The stability of private sector regular wage growth suggests the Bank of England (BoE) will only cut interest rates gradually. Our base case is that the Monetary Policy Committee (MPC) will cut rates once a quarter next year, but a second Trump presidency raises the risk of fewer rate cuts. 

UK labour market stabilising 

At face value, the jump in the unemployment rate from 4.0% to 4.3%, which was driven by an 100k increase in unemployment, is a cause for concern. But the employment statistics are so ropey at the minute that it’s difficult to take the big swings in the unemployment rate this year seriously.

Looking more broadly, vacancies fell again to 831k in the three months to October, from 840k in September and the lowest since May 2021. The number of employees on payrolls fell by 5k in October, from a 9k decline previously. However, payrolls data is often subject to big revisions. 

Looking through the volatility and taking into account a broad range of measures, the unemployment rate has likely been rising very gradually over the past two years.

Sticky pay growth 

The pay growth picture was a little more complicated than usual. 

The rise in the 3m y/y rate of total average earnings growth for the whole economy from 3.9% in August to 4.3% in September was mainly due to a rebound in public sector pay from 0.1% to 3.5%. A lot of that was due to the base effects from rises in civil service pay last year, which fell out of the latest three-month period and the first of the public sector pay deals came into effect. Public sector pay will probably jump again in October as the rest of the 5-6% pay deals agreed in recent months start to take effect.

However, private sector earnings excluding bonuses was stable at 4.8% in September. This is the measure that the MPC cares most about as its much more strongly related to inflation pressures. 

Looking forward, we expect pay growth to slow more sharply in 2025 as firms try to rebuild their profit margins after the increase in National Insurance Contributions confirmed in the Autumn Budget, by reducing future wage increases. Combined with higher inflation, we expect real wages to barely grow in 2026.

The policy outlook 

The BoE opted to retain a cautious tone around policy easing as it delivered another rate cut at its November meeting. Inflation has come down substantially, but the MPC isn’t yet convinced the 2% target is durably in sight.

The latest wage print is unlikely to shift its thinking. The fiscal loosening contained in the Autumn Budget, as well as measures like the near -7% National Living Wage rise and the increase to employers’ National Insurance contributions, also pose new risks to price and wage setting behaviour further ahead.

Overall, there’s little to justify a more aggressive approach to rate cuts from the MPC in the latest batch of jobs data. Our base case is the central bank will ease at quarterly steps next year.

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