Wage growth has fallen below 5% for the first time in over two years, narrowing the gap with inflation and increasing the likelihood of further interest rate cuts. According to the Office for National Statistics (ONS), regular pay (excluding bonuses) rose by 4.9% in the three months to August, down from 5.1% in the previous period. Total earnings, including bonuses, grew by just 3.8%.
The Bank of England (BoE) is expected to treat this as a sign that wage growth is returning to normal, paving the way for quicker interest rate reductions. The labour market, however, shows signs of weakening, with unemployment falling slightly to 4% and job vacancies nearing pre-pandemic levels.
While inflation has dropped from its 9.4% peak in 2022 to 2.2% in August this year, the BoE has only cut interest rates once, from 5.25% to 5%. Business groups are urging additional cuts as economic growth stalls, with forecasts indicating flat performance in the third quarter following a rise of over 1% earlier this year.
Chancellor Rachel Reeves’s upcoming Budget is expected to include tax rises, such as higher capital gains tax and an increase in employers’ national insurance contributions, as part of efforts to close a £22bn spending gap. These measures could further slow economic growth despite promises of increased infrastructure spending.
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