UK interest rate cuts less likely after pay growth accelerates – business live | Business
Bank of England interest rate cuts now less likely
City traders are scrambling to readjust their expectations for UK interest rate cuts, following this morning’s acceleration in UK wage growth.
The money markets now indicate there’s just a 7% chance that the Bank of England cuts interest rates on Thursday, down from around 15% yesterday.
The markets no longer expect three cuts next year either. Bank rate, which is currently 4.75%, is now seen falling to around 4.1% in December 2025, meaning only two quarter-point rate cuts are fully priced in.
Yesterday it was expected to fall nearer to 4%, which had implied three quarter-point rate cuts next year.
UK RATE FUTURES POINT TO ABOUT 61 BASIS POINTS OF BANK OF ENGLAND RATE CUTS BY END OF 2025 VS 69 BPS BEFORE UK LABOUR MARKET DATA
Ashley Webb, UK economist at Capital Economics, says today’s wage data will do little to shift the Bank’s focus away from worrying about high inflation, explaining:
The increase in regular private sector pay growth in October will increase the Bank of England’s concerns about a resurgence in inflation despite the weak news on activity.
Key events
FTSE 100 hits three-week low as Bunzl suffers deflation
Stocks are in retreat in London this morning, pulling the FTSE 100 share index down to its lowest level since 22 November.
The FTSE100 is down 57 points, or 0.7%, at 8,205 points.
Bunzl, the distribution and outsourcing company, are the top faller, down 4.6% after warning that its operating profits will be hit by stickier than anticipated deflation, particularly in continental Europe.
Other European markets are also in the red, with Italy’s FTSEMib down 0.5% and small losses in Paris and Frankfurt.
Matt Britzman, senior equity analyst at Hargreaves Lansdown, says:
“The FTSE 100 has opened down 0.7% this morning, following a broader trend lower across European markets. Investors are digesting key UK wage data and bracing for interest rate decisions from major central banks, including the Bank of England and the US Federal Reserve.
Rates are expected to hold firm in the UK later in the week, while the US looks all but certain to cut on Wednesday.
Billionaire Guy Hands’s property firm sells military homes to MoD for £6bn
Julia Kollewe
A property company linked to Guy Hands has agreed to sell 36,000 military homes to the UK’s Ministry of Defence for almost £6bn, signalling an end to a long-running battle between the billionaire and the government.
Annington will hand over its 999-year lease on the Married Quarters Estate to the MoD and receive £5.99bn in return – almost twice as much as Hands’s company Terra Firma paid for Annington more than a decade ago, but less than the £8bn the homes were valued at last year.
The sale ends court proceedings brought by Annington over planned housing reforms.
In September, the company took a legal fight with the UK government to the European court of human rights over fears it could lose significant sums as a result of the new Leasehold and Freehold Reform Act. It also launched a challenge in the high court on the same grounds.
Thames Water seeking court approval for emergency bailout today
Today is a crunch day for struggling UK utility Thames Water.
Thames is heading to the High Court this morning to seek appoval for a £3bn emergency loan designed to keep the company afloat.
If Thames can’t get the emergency funding from its creditors, it risks running out of cash by next March, putting it at greater risk of temporary nationalisation.
Last month, Thames won support from 75% of the holders of its least risky loans – known as class A debt – for the cash lifeline, the minimum threshold needed to receive court approval for changes to its debts.
Securing the emergency cash would give Britain’s biggest water company time to try to raise the billions of pounds of new equity investment it needs to return to a more stable footing.
The court hearing, which starts at 10.30am before Mr Justice Trower, comes at the start of a crucial 48-hours for Thames and the industry.
On Thursday, regulator Ofwat will publish its “final determination” on water company five-year business plans, setting out how much they will be permitted to increase consumer bills and what return they can offer investors.
ING have calculated that UK private sector wage growth increased by 12% on a one-month annualised basis in October.
This will matter for the Bank of England, they say, because private sector pay trends tend to be more reflective of the wider situation in the jobs market than in the public sector.
James Smith, developed markets economist at ING, told clients:
Admittedl, these numbers can be volatile and it’s hard to pin an obvious reason on the latest surge. But it will heighten suspicion among BoE hawks that wage growth is not going to readily come back down to pre-Covid levels.
A chart showing annualised UK private-sector pay growth to October 2024 Illustration: ING
Today’s “red hot private sector wage figures” almost guarantee that the Bank of England will stress a slow and steady approach to rate cuts on Thursday, predicts Matthew Ryan, head of market strategy at global financial technology firm Ebury.
He adds:
While UK inflation now appears largely under control, still sky-high earnings growth, combined with the pro-inflationary impact of the Autumn Budget and Trump’s trade policies, risks keeping consumer prices higher for longer.
“There is now effectively zero chance that the MPC lowers rates again this week, with today’s news raising the possibility of a unanimous vote among the committee in favour of no change. The communications will place a heavy emphasis on the need for a ‘gradual’ approach to easing in 2025, which would likely raise doubts over the prospect of another rate reduction in February. Indeed, markets are now barely pricing in two 25 basis points cuts throughout the entirety of next year.
UK government bonds hit by rising wages
The prices of UK government bonds are falling in early trading, lifting the yield – or interest rate – on the debt.
Investors are calculating faster-than-expected wage growth means inflation, and interest rates, could be higher than previously forecast, meaning they expect a higher rate of return for holding UK debt.
The yield on two-year UK bonds – used to price fixed-term mortgages – has risen by 8 basis points to 4.35%, up from 4.27% last night.
Benchmark 10-year UK gilt yields are up 7 basis points, to 4.5%, while long-dated 30-year bond yields have risen by 5bps, to over 5%.
Liz Kendall: we need to get Britain working again
On today’s labour force statistics, Work and Pensions Secretary, Liz Kendall MP says:
“Today’s figures are a stark reminder of the work that needs to be done.
To get Britain growing again, we need to get Britain working again – so people have good jobs which pay decent wages and offer the chance to progress.
Through our Get Britain Working Plan we will do just that – transforming Jobcentres, making sure every young person is earning or learning and properly joining up work, health and skills support to drive up employment and drive down poverty in every corner of our country.
And from April, someone working full time on the minimum wage will be £1,400 better off, meaning more money in people’s pockets, delivering on the plan for change to improve living standards and make people better off.”
The pound has nudged up to $1.27 against the US dollar, up 0.15%, to its highest since last Friday, after this morning’s UK jobs report.
Another sign that interest rates cuts are seen as less likely….
Today’s pay growth figures will make the Bank of England’s monetary policy committee “nervous”, says Thomas Pugh, economist at audit, tax and consulting firm RSM UK.
Pugh explains:
“The jump in wage growth excluding bonuses to 5.2% puts another nail in the coffin of an interest rate cut on Thursday. What’s more, there was little sign that firms have reduced hiring ahead of the budget. Our base case is that the MPC will cut rates once a quarter next year, but strong wage growth and a second Trump presidency increases the risk of fewer rate cuts.
Pugh adds there is little evidence that pre-budget worries caused firms to radically alter their employment plans.
Employment rose by 173,000 in the three months to October and the unemployment rate remained at 4.3%. Admittedly, the employment statistics are unreliable at the minute so the jump may have been driven by revisions to the data rather than a genuine increase. It may also be that most of the impact on the labour market will come after the budget.
Indeed, the number of employees on payrolls dropped by 35,000 in November, but this metric is extremely volatile, and we don’t put much faith in one month’s numbers so this is one to watch.
Bank of England interest rate cuts now less likely
City traders are scrambling to readjust their expectations for UK interest rate cuts, following this morning’s acceleration in UK wage growth.
The money markets now indicate there’s just a 7% chance that the Bank of England cuts interest rates on Thursday, down from around 15% yesterday.
The markets no longer expect three cuts next year either. Bank rate, which is currently 4.75%, is now seen falling to around 4.1% in December 2025, meaning only two quarter-point rate cuts are fully priced in.
Yesterday it was expected to fall nearer to 4%, which had implied three quarter-point rate cuts next year.
UK RATE FUTURES POINT TO ABOUT 61 BASIS POINTS OF BANK OF ENGLAND RATE CUTS BY END OF 2025 VS 69 BPS BEFORE UK LABOUR MARKET DATA
Ashley Webb, UK economist at Capital Economics, says today’s wage data will do little to shift the Bank’s focus away from worrying about high inflation, explaining:
The increase in regular private sector pay growth in October will increase the Bank of England’s concerns about a resurgence in inflation despite the weak news on activity.
Real earnings accelerate too
UK pay growth has also jumped once you adjust for inflation.
Using CPI real earnings, real regular and total pay rose by 3.0% on the year in August to October, the Office for National Statistics reports.
That’s the fastest growth in real pay since this spring, the ONS explains:
Regular real annual growth was last higher than 3.0% in April to June 2024 (3.2%) and for total real pay was equal to 3.0% in March to May 2024. Total annual growth is no longer affected by the civil service one-off payments made last year.
Introduction: UK pay growth picks up
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Pay growth across the UK has picked up, ending the recent slowdown in earnings, even though fewer vacancies are available for workers across the economy.
New data from the Office for National Statistics this morning show that average pay, both including and excluding bonuses, rose by 5.2% per year in the three months to October.
That’s up from 4.9% for regular earnings in July-September, and 4.4% for total earnings [updated], suggesting an acceleration in pay growth this autumn.
Manufacturing workers saw the largest pay rises, again, with average pay up by 6.0%.
Regular earnings (ex-bonuses) swelled by 5.4% in the private sector, and by 4.3% in the public sector, the ONS reports.
While rising pay will cheer workers, especially as Christmas bills pile up, it will cause some jitters at the Bank of England – where policymakers fret about inflationary pressures building.
ONS director of economic statistics Liz McKeown said:
“After slowing steadily for over a year, growth in pay excluding bonuses increased slightly in the latest period, driven by stronger growth in private sector pay. Pay growth including bonuses increased by more, but this reflects previous figures being affected by the one-off payments made to some public sector employees in 2023.
“The number of people on payrolls grew slightly in October, but we have seen annual growth rates continue to slow, showing a consistent trend with our latest jobs data from employers. The number of job vacancies has also fallen again, though the total remains a little above where it was before the pandemic.
More broadly, the latest labour force statistics also show another decrease in vacancies; they fell by 31,000 in the September-November quarter to 818,000 – still above their levels before the Covid-19 pandemic.
The ONS has reweighted the Labour Force Survey with updated population data, in an attempt to make its statistics more reliable.
Today’s report shows that the unemployment rates was 4.3% in the three months to October, the same as a month ago.
Joe Nellis, economic adviser to accountancy and advisory firm MHA, says:
The unemployment rate holding steady at a relatively low 4.3% is not a significant cause for celebration, as the long-standing problems in the UK’s labour market continue to undermine attempts to reignite a flatlining and underperforming economy.
The economic inactivtiy rate, which measures how many people are neither in work nor looking for a job, was estimated at 21.7% in August to October 2024, slightly lower than the 21.8% in July-September.
