Recent data from the UK’s Office for National Statistics (ONS) reveals a further cooling in wage growth, raising the prospect of earlier-than-expected interest rate cuts by the Bank of England (BoE). At the same time, there are emerging signs that the downturn in hiring activity may be stabilizing.

In the three months to August, average weekly earnings (excluding bonuses) increased by 4.7% year-over-year the slowest pace of growth since May 2022, and just below the 4.8% rate recorded in the previous three month period. This deceleration aligns with expectations from a recent Reuters poll.

The ONS also reported that payrolled employment rose by 10,000 between July and August the first notable increase since October 2024 before declining again by 10,000 in September, according to preliminary estimates.

“After a sustained period of soft hiring, the decline in payroll numbers and vacancies now appears to be levelling off,” said Liz McKeown, ONS Director of Economic Statistics.

In a further sign of labour market strain, the UK unemployment rate edged up to 4.8%, from 4.7% previously. However, the ONS emphasized that the underlying survey data is still undergoing methodological improvements.

The BoE’s Monetary Policy Committee (MPC) continues to monitor wage growth closely, as it remains a key driver of domestic inflation. Although the BoE opted to hold rates at 4% last month, Tuesday’s report has prompted a modest shift in investor sentiment. Markets are now pricing in a 25 basis-point rate cut in March 2026, brought forward from April. A second rate cut is increasingly anticipated before the end of 2026.

“Wage growth, coupled with a rising unemployment rate, adds a dovish undertone to today’s labour market data,”
noted Rob Wood, Chief UK Economist at Pantheon Macroeconomics.

The release triggered an immediate market response, with Sterling falling sharply against both the U.S. dollar and the euro.

Private sector wage growth slowed further, rising by just 4.4% in the June August period its lowest level since December 2021.

“The slowdown in regular pay within the private sector provides some reassurance that disinflationary forces remain at play,”
said Thomas Pugh, Chief Economist at RSM UK.
“However, total pay growth is still elevated, and with inflation expected to hit 4% in September, this is unlikely to justify a rate cut in the near term.”

Meanwhile, BoE policymaker Megan Greene remarked this week that the labour market impact of recent fiscal policy changes particularly Finance Minister Rachel Reeves’ increase to employers’ social security contributions in April appears to have largely worked through the system.

This latest data illustrates the delicate balancing act facing central banks in developed economies: navigating inflation risks while responding to softening labour markets. For senior executives and policy leaders, understanding these shifts is essential for forecasting talent costs, capital allocation, and broader macroeconomic strategy.

Source:Reuter