“Chancellor could be about to throw a wildcard into the mix”
Rob Morgan, chief investment analyst at wealth manager Charles Stanley:
UK wage rises receded a little further in the June to August period with annual growth in employees’ average regular earnings excluding bonuses coming in at 4.9%. This was a further small step down from the 5.1% increase in the equivalent period to July and in line with prior expectations.
The jobs market is cooling in terms of wage rises. However, there is still lingering tightness with the unemployment rate remaining low at 4.0%. The increase in remuneration remains above the level the Bank of England would believe is compatible with inflation keeping to its 2% target. Greater spending power ultimately influences prices, while wage increases directly feed into company costs, especially in the worker-heavy services sector.
The good news for households is that wage rises are reflective of wider economic health and helpful in battling cost of living increases seen over the past couple of years. Yet continued resilience could put pressure on those with borrowings as it could limit the extent to which the BoE can sustainably restrict inflation and, as a result, cut interest rates.
Wages still a concern for the Bank of England
The BoE has been closely monitoring wage data and its effect on services inflation, and this latest reading will not have extinguished concerns that price rises are more structural in nature. It may therefore choose to be less aggressive on cutting rates.
However, the chancellor could be about to throw a wildcard into the mix. Taxation policies could have a major influence on both wages and wider inflation, so all eyes are on the Budget later this month.
If rumours are to be believed surrounding an increase to employer national insurance, wage rises could be curtailed going forward as bosses attempt to limit the impact of paying higher staff costs. With inflation still not entirely snuffed out this could ramp up the cost-of-living pressures on working families.
However, the effects are not clear cut. Employers consider the total cost of an employee, which includes employer NICs and pension contributions. If these were to increase it could lead to businesses restricting new hires, limiting pay rises or scaling back pension payments. Yet some may instead look to pass these costs on in terms of higher prices. This would be inflationary rather than disinflationary, but it may be difficult in a competitive market.
Overall, a fiscally tight Budget is likely to dampen inflationary pressures by curbing household spending.
When will interest rates be cut again?
Governor Andrew Bailey’s recent comments that the BOE could be “a bit more aggressive” with cuts if inflation data remains favourable briefly raised hopes of a steeper downward trajectory for UK interest rates. However, it didn’t really depart from his overall stance of data dependency. Meanwhile, others on the MPC have been more outspoken on the impact of strong wage growth taking a long time to ease. Continued sticky wages and services prices call for only a gradual withdrawal of restrictive policy.
Much like the BoE. we believe inflation will continue to trend downwards, but pressures will persist and potentially influenced by fiscal policy in the Budget. Overall, we expect the BoE will cut four times over the next year, which is slightly more conservative than market expectations of six cuts (of 0.25% each).
Given the pause in September, a further 0.25% looks firmly on the table for the November meeting. By this stage the ramifications of the Budget can be digested by the voting MPC members. Particularly tight fiscal policy might encourage the Bank to reduce rates at faster clip – but we will have to wait and see what’s inside the red box.