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Bank of England governor Andrew Bailey played down the latest pay data in a fireside chat today with German think tank Bruegel, saying UK pay growth did not go up "quite as much" as the central bank had expected.
"We spent a lot of time on the pay issue in the monetary policy report," he said, adding that the bank expects pay growth to normalise over time.
"Pay growth went up, but not quite as much as we were expecting," he said.
The governor held the bank's usual stance when asked about rate cuts. "We've used the words gradual and careful. We're not providing a steer" on policy, he said. "We take it meeting by meeting."
In the bank's last monetary policy meeting it cut rates by 0.25% to 4.5%, a decision which split the nine-person committee. Two members favoured a 0.5% cut, while seven opted for the more cautious 0.25% reduction.
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Bailey's comments came after data from the Office for National Statistics this morning showed UK pay growth had risen once again in the final quarter of last year, adding to concerns about persistent inflationary pressures.
UK average weekly earnings climbed by 5.9% in the three months to December on an annual basis, up from 5.6% in the previous three months. Wage growth continued to outstrip inflation, which unexpectedly fell in December but was still above target at 2.5%.
Meanwhile, annual average earnings – adjusted for inflation – were up 2.5% from the previous year, marking the fastest growth since the summer of 2021.
Market watchers have questioned whether this will be a problem for the BoE's rate cut path.
"With vacancies falling, and unemployment rising, we expect wage growth to moderately slow but remain elevated at 5.2% in the first quarter of 2025," said Monica George Michail, associate economist at the National Institute of Economic and Social Research, in an email.
"Persistent strong wage growth has been causing a headache to the Bank of England and will likely continue to do so in the next few months, leading the MPC to exercise more caution with regards to interest rate cuts.”
Government policy could also have an impact on this, as the national insurance increase in chancellor Rachel Reeves first budget feeds through.
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“The upcoming changes to employer national insurance contributions are also expected to weigh on hiring decisions, and today’s data suggests businesses may already be adjusting their workforce strategies to manage higher costs," said Richard Carter, head of fixed interest research at Quilter Cheviot.