UK Interest Rate Cuts May Be Scaled Back as Pay Growth Picks Up
A top policymaker at the Bank of England has warned that strong UK pay growth could limit interest rate cuts this year, citing concerns that wages are growing strongly again and may be fueling inflation. Megan Greene, a member of the Monetary Policy Committee, cautioned that wage growth "may have run its course" and pointed to recent surveys showing employers planning to hand out pay rises of 3.5% or more.
The latest official figures showed a slight weakening in wage growth, excluding bonuses, to 4.5% between September and November, from 4.6% in the previous three months. However, this is still above the Bank's target inflation rate of 2%. Consistent wage growth tends to push up inflation if there is not a corresponding rise in productivity growth, which Greene believes will not happen this year.
The policymaker also noted that interest rate decisions could be affected by potential rate cuts in the US Federal Reserve. If the Fed lowers rates more aggressively than the Bank of England, it could cause US demand for UK exports to rebound, providing upward pressure on UK inflation.
This warning comes as a separate report from the Bank concluded that it had consistently underestimated the full effects of inflation after Russia's invasion of Ukraine in 2022. The central bank acknowledged that its medium-term inflation and wage growth forecasts proved too low and vowed to improve its modeling and understanding of key economic mechanisms, including the labor market.
Meanwhile, a closely watched survey of UK businesses showed a sharp rise in costs in January, with companies reporting elevated wage pressures alongside rising transport bills and raw material prices from suppliers. The survey also found a "steep loss" of jobs among many respondents, particularly in the hospitality sector.
As a result, City economists have reduced their expectations of the MPC making two interest rate cuts this year, with the first quarter-rate cut now not expected until June. However, the survey's reading of 53.9 in January remains above 50, indicating growth.
A top policymaker at the Bank of England has warned that strong UK pay growth could limit interest rate cuts this year, citing concerns that wages are growing strongly again and may be fueling inflation. Megan Greene, a member of the Monetary Policy Committee, cautioned that wage growth "may have run its course" and pointed to recent surveys showing employers planning to hand out pay rises of 3.5% or more.
The latest official figures showed a slight weakening in wage growth, excluding bonuses, to 4.5% between September and November, from 4.6% in the previous three months. However, this is still above the Bank's target inflation rate of 2%. Consistent wage growth tends to push up inflation if there is not a corresponding rise in productivity growth, which Greene believes will not happen this year.
The policymaker also noted that interest rate decisions could be affected by potential rate cuts in the US Federal Reserve. If the Fed lowers rates more aggressively than the Bank of England, it could cause US demand for UK exports to rebound, providing upward pressure on UK inflation.
This warning comes as a separate report from the Bank concluded that it had consistently underestimated the full effects of inflation after Russia's invasion of Ukraine in 2022. The central bank acknowledged that its medium-term inflation and wage growth forecasts proved too low and vowed to improve its modeling and understanding of key economic mechanisms, including the labor market.
Meanwhile, a closely watched survey of UK businesses showed a sharp rise in costs in January, with companies reporting elevated wage pressures alongside rising transport bills and raw material prices from suppliers. The survey also found a "steep loss" of jobs among many respondents, particularly in the hospitality sector.
As a result, City economists have reduced their expectations of the MPC making two interest rate cuts this year, with the first quarter-rate cut now not expected until June. However, the survey's reading of 53.9 in January remains above 50, indicating growth.
I'm thinking, if pay growth is gonna keep going up like that, maybe interest rate cuts this year aren't gonna happen as much? Like, if people are getting a bigger slice of the pie and paying more for transport & raw materials, it might actually boost inflation instead of cooling it down 
. The Bank's all like "we underestimated inflation" and now they're trying to be more careful with their forecasting, which is kinda fair tbh 
. I'm still hoping we get some rate cuts, but if not, maybe it'll just mean the economy keeps humming along, no big deal 
I'm thinking that if pay growth is getting strong again, it might put a bit of pressure on the Bank of England to hold off on interest rate cuts this year... 
Like, we don't want inflation to get outta control, but at the same time, people need some cash in their pockets, you know? 
It's all about finding that balance. And with businesses reporting high wage pressures and rising costs, it's clear that economic growth is still going strong... even if jobs are being lost in certain sectors 
. The Fed's interest rate decisions could also play a role here - if they lower rates too much, it might affect the UK's inflation situation. All this stuff makes me wonder how the Bank of England will navigate these complex economic waters... 
But if there's actually some kind of catch-up in productivity, then maybe this isn't the end of the world after all... 
I don't know how much more I can take from these forums. Every time there's a big economic news update, it feels like the same old debate about interest rates and inflation. Like, can we just get some actual analysis here instead of just regurgitating what the experts say? 
what a mess! its like no one knows whats going on in the economy anymore 
. But at the same time, if wages keep going up like this... I don't know, maybe interest rates won't be as high as people think? 
i feel like im late to the party again lol just saw this thread and its dead 
anyway, what caught my attention was that pay growth is picking up... i think its good for ppl but also means higher inflation 
. It seems like wages are growin' pretty fast and that's causin some concern for policymakers. I mean, if wages keep risin at 4.5% or more, it could be fuelin inflation again 
.
. Fingers crossed that they're right! 
they'll prob keep rates high 4 a wile longer cuz ppl r gettin paid more n inflation wudnt b surprised if we c a rebound in uk exports tho 
if the fed starts cuttin rates aggressively, it cud b big news 
? The whole thing feels a bit back-and-forth to me... like, what if they raise rates too much and we're back in recession 
.
.
. I guess you could say the government's job creation policies aren't quite workin' out as planned either 
. We need more than just stimulus packages and monetary policy tweaks to get our economy growin' 
... also us fed rate cuts could make things worse for the uk economy 
... but at the same time im not expecting much from the bank of england theyve been off mark before 
... maybe we need a more flexible interest rate policy or something like that 
.