UK wage growth slowed to the lowest level in two years in May, providing a dilemma for the Bank of England rate setters when they decide whether to cut interest rates next month.
Annual pay growth eased from 5.9% in the three months to April to 5.7% in the three months to May, data from the Office for National Statistics shows.
Unemployment was unchanged from 4.4% in April, while the number of job vacancies fell by 30,000, led by easing demand in retail and hospitality amid a cooling jobs market.
This led traders to lift bets on an August interest rate cut.
Money markets indicate there is a 45% chance of the Bank of England lowering borrowing costs next month.
The chances dropped to as low as 25% on Wednesday after inflation held steady at 2%, but key services prices were also unchanged at 5.7% driven by rising hotel prices.
The BoE base rate has remained at a 16-year high of 5.25% since last August.
The last time the base rate was cut was in March 2020, with the Monetary Policy Committee next due to meet on 1 August.
Pantheon Macroeconomics UK chief economist Rob Wood says: “We think an August rate cut is a very close call. The MPC could easily dismiss yesterday’s stronger-than-expected consumer price inflation services reading as volatile, just as they did in June, note slowing wage growth, and plough on with a rate cut in August.
“But we think services inflation is just too hot for the MPC to go ahead in August, and instead expect them to wait until September to reduce interest rates.”
EY UK chief economist Peter Arnold points out: “Today’s data leaves August’s monetary policy decision in the balance. Pay growth is on track to come in around the Bank of England’s 5.1% forecast for the second quarter.
“Now that there has been time to take a more granular look at yesterday’s inflation data, it’s apparent that most of the upside surprise can be traced back to a couple of exceptionally high quotes for hotel prices. Therefore, it’s far from clear that the inflation data alone will derail a rate cut.
“The MPC’s main issue now is that following yesterday’s data release, financial market pricing moved decisively in favour of rates staying on hold. So, whether or not the MPC cuts next month may ultimately come down to whether or not they are prepared to surprise markets.”
Quilter Investors investment strategist Lindsay James adds: “Looking ahead to 1 August, it seems marginally less likely that the Bank of England’s first rate cut will materialise after inflation failed to cool any further, so September may be a more reasonable expectation for an initial easing of monetary policy.
“Nonetheless, inflation is still at target and the labour market is showing some signs of cooling, so we are likely to see more members of the MPC voting for a cut in the August meeting.”
