UK Pay Growth Slows Down: What Does It Mean for Interest Rates?
Recently pay growth in the UK has slowed down. It has slowed to its lowest level in two years. In the three months leading up to July average weekly earnings excluding bonuses increased by just 5.1%. This is a big change considering how wages were rising faster before. Even when bonuses are included total pay growth dropped to just 4% the lowest in nearly four years.
Why Does This Matter?
The Bank of England is working to control inflation and make the economy stable. Inflation happens when the prices of goods and services rise, and the Bank of England uses interest rates to help control it. The Bank of England recently reduced interest rates from 5.25% to 5% in August. The slowing of wage growth gives the Bank of England more confidence in possibly lowering interest rates again later this year.
When pay growth slows it shows that people's earnings are not increasing as quickly. This helps to keep inflation under control. Why because there is less pressure on businesses to raise prices to match rising wages. If inflation stays low the Bank of England may decide to lower interest rates again to 4.75% by the end of the year.
What's Happening with Jobs?
While wages are not growing as fast the job market still has some bright spots. About 265000 new jobs were added in the same period. However not everything is positive. The unemployment rate has gone down slightly to 4.1%, but there are fewer job vacancies available. The number of job vacancies dropped by 42000 from June to August. Apart from that the number of people on payrolls fell by 59000 between July and August .
What Could Happen Next?
Economists believe that the Bank of England might cut interest rates again in November if wage growth stays low and the job market remains stable. The goal is to encourage spending and investment. This can help the economy grow. Lower interest rates make borrowing cheaper. This can lead to more spending by businesses and consumers.
