By Benson Daniel
UK wage growth has slowed to 3.9 per cent, adding to signs that the labour market is losing momentum as the Bank of England prepares for a closely watched interest rate decision.
Average total earnings, including bonuses, increased by 3.9 per cent in the three months to July, down from 4.1 per cent in the previous three-month period. The slowdown comes as businesses face weaker hiring conditions and households continue to deal with elevated living costs.
Regular pay growth, which excludes bonuses and is closely monitored as an indicator of underlying wage pressures, also eased to 3.5 per cent over the period.
The latest figures are likely to strengthen arguments for caution from the Bank of England as policymakers weigh persistent inflation against signs of a cooling employment market. The central bank is due to announce its next interest rate decision on Thursday, with Bank Rate currently at 3.75 per cent.
The labour market data showed further evidence of weakening demand for workers. Job vacancies fell by about 8,000 in the three months to August to 702,000, marking the lowest level outside the pandemic period since 2014.
Payrolled employment also declined by around 26,000 in August, while unemployment remained at 4.9 per cent in the three months to July.
The slowdown has been particularly notable in the private sector, where annual wage growth excluding bonuses has fallen to 2.9 per cent. Public-sector pay growth remains considerably stronger, creating a wider gap between earnings across the two parts of the economy.
For the Bank of England, the figures present a difficult balancing act. Slower wage growth and weaker recruitment could point towards a more cautious approach to interest rates, particularly if policymakers are concerned about putting additional pressure on businesses and households.
At the same time, inflation remains above the central bank’s 2 per cent target, while higher energy prices linked to geopolitical tensions have raised concerns about renewed inflationary pressure.
The combination of weaker employment conditions and stubborn inflation makes the coming months particularly important for monetary policy. While a rate increase is not currently expected at the immediate meeting, financial markets have been reassessing the possibility of higher rates later in the year if energy costs remain elevated and inflation continues to rise.
The wage figures also have implications beyond monetary policy. Under the UK’s state pension triple-lock system, earnings growth is one of the measures used to determine the annual increase in pension payments.
If the 3.9 per cent wage figure becomes the applicable benchmark, the full new state pension could rise by roughly £9.40 a week from April 2027, taking the annual payment above £13,000. The final increase will depend on the other elements of the triple-lock calculation, including inflation.
For employers, however, the broader message from the latest figures is one of a labour market that is becoming less dynamic. Falling vacancies and weaker private-sector pay growth suggest businesses are becoming more cautious about recruitment as they contend with operating costs and uncertain economic conditions.
The Bank of England will therefore have to balance the need to prevent inflation from becoming entrenched with the growing evidence that higher borrowing costs and weaker demand are weighing on the labour market.
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