Photographer: Chris Ratcliffe/Bloomberg

U.K. Wage Pressures Ease in Face of Tightening Labor Market

  • Pay growth excluding bonuses slows to 2% August to October
  • Economists see BOE raising key rate in 2Q at the earliest

U.K. wage growth slowed more than economists forecast, reinforcing the case for the Bank of England to keep borrowing costs at a record-low for now.

Pay excluding bonuses rose an annual 2 percent between August and October, the least since February, the Office for National Statistics said in London on Wednesday. Economists in a Bloomberg survey had predicted 2.3 percent. Total wage growth eased to 2.4 percent.

The figures suggest wage pressures remain benign despite growing evidence that the labor market is tightening. Today’s figures showed unemployment fell to 5.2 percent in the latest three months, the lowest since May 2008, and the number of people in work rose to a record.

With consumer-price inflation far below its 2 percent target, there is little immediate pressure on the BOE to increase its benchmark interest rate. The median forecast of economists surveyed this month is for a quarter-point move in the second quarter at the earliest. The Federal Reserve, by contrast, is expected to lift its key interest rate on Wednesday.

While inflation just above zero means pay is continuing to grow in real terms, “both wages & CPI need to show signs of life for the BOE to sanction higher rates,” said George Buckley, an economist at Deutsche Bank AG in London.

The pound fell following the figures and was trading at $1.4997 as of 10:19 a.m. London time, down 0.3 percent on the day.

Productivity Question

For BOE policy makers, much depends on productivity. If companies increase the output of existing workers, wages can grow without generating inflationary pressures. But if they can only meet demand by employing more, labor shortages could force them to lift pay to fill vacancies, putting pressure on costs and stoking price gains. Unemployment in October fell to 5.1 percent, the lowest since May 2008, experimental figures published by the ONS showed.

BOE Deputy Governor Minouche Shafik said on Monday that she would wait for wage growth to be sustained at a level consistent with inflation returning to target -- likely 2 to 3 percent above productivity -- before voting for an interest-rate increase.

Unemployment fell 110,000 between August and October to 1.71 million and employment climbed 207,000 to 31.3 million. Claims for jobless benefits, a narrower measure of unemployment, rose 3,900 in November. The rate held at 2.3 percent.

‘Good Progress’

“This is good progress but as we move closer to our goal of full employment we need to continue to help the hardest to reach into work and ensure as many people as possible benefit from the growing economy,” Chancellor of the Exchequer George Osborne said in a statement released by the Treasury.

Separate data released by the BOE on Wednesday added to evidence of easing pay pressure. The central bank’s survey of regional business contacts for the fourth quarter showed while recruitment difficulties had broadened, there were signs that low inflation was pushing down on wage growth. The report, compiled between late August and late November, also found employment intentions had eased from the previous quarter.

The slowdown in pay growth suggest wages pressures are set to remain muted through 2015. In October, wages excluding bonuses increased 1.7 percent, the weakest month since January. In the private sector pay grew 1.8 percent, also the lowest since the start of the year.

Separate figures published by the ONS showed employment in central and local government fell by 14,000 in the third quarter to 5.17 million, the lowest for 15 years.

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