General Election 2024: Hopes for interest rate cut suffer further blow

The prospect of a pre-election interest rate cut by the Bank of England has been damaged by official figures showing no progress in bringing down the pace of wage growth.

Data from the Office for National Statistics (ONS) showed basic pay rising at an annual rate of 6% in the three months to April.

That was flat on the figure reported by the ONS for the past two months. Upwards pressure came from the government’s 9.8% rise in the National Living Wage, which took effect in April.

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When the impact of inflation was taken into account, the wage rate stood at its highest level since July 2021 at 2.9%.

The pay measure that includes bonuses actually rose to 5.9% from 5.7%, according to the ONS

While it is good news for voters as it leaves pay growth at way more than double the 2.3% inflation rate, it will not help persuade the Bank of England that the time is right for an interest rate cut when it reveals its latest decision on 20 June.

Rishi Sunak would be keen for the Bank, which is independent of the government, to impose a cut to borrowing costs on that date to bolster his case that the outlook for household and consumer finances is improving.

With the Conservatives far behind Labour in the polls, the employment figures from the ONS are the last before polling day on 4 July.

The data also showed a rise in the unemployment rate to 4.4% from 4.3%, though this figure comes with a big health warning from the ONS due to continuing reliability issues with its labour force survey.

The same caution was applied to the figure covering the number of people of working age judged to be economically inactive.

That stood at 9.4 million and was up on the previous month due to a rise in long term sickness and care demands.

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The ONS said: “This month’s figures continue to show signs that the labour market may be cooling, with the number of vacancies still falling and unemployment rising, though earnings growth remains relatively strong.”

What this all means for the Bank

The big picture is definitely mixed. The jobless rate figure in particular may have some influence in Threadneedle St as it signals further damage to the economy from higher interest rates.

The Bank has hinted that an interest rate cut is likely in the coming months but it remains worried about sticky services inflation and the pace of wage growth fuelling more price rises in the economy.

Basic pay increases have outpaced the rate of inflation since last June, boosting consumer spending power on the face of it, but household budgets have remained squeezed.

The cost of living crisis, exacerbated by unprecedented raw energy price hikes following Russia’s invasion of Ukraine, has evolved over time to even extend to the Bank’s medicine to supress inflation.

There were 14 consecutive interest rate increases from December 2021 up until last summer aimed at dampening demand to help bring price growth down.

The rate hikes drove up the cost of borrowing, with mortgage holders for example facing additional bills of hundreds of pounds more per month on average as low fixed rate terms expired.

New deals proved eyewatering in comparison.

With the main consumer prices index measure of inflation running at 2.3% – above the Bank’s 2% target – members of the rate-setting committee have acknowledged progress but they are unlikely to follow the European Central Bank in cutting rates this month.

Financial markets saw just a 10% chance of a rate cut from 5.25% to 5% on 20 June.

Most of the money is on September.

However, those predictions could yet shift.

The ONS is also set to release this week the preliminary growth figures for the economy in April. They are predicted by economists to show zero growth for the month, largely due to the impact of poor weather.

The following week sees the publication of the latest inflation figures.

How political parties have reacted

Commenting on the jobs data, shadow Work and Pensions Secretary Liz Kendall said: “Today’s figures confirm that the Tories have no hiding place after 14 years of abject failure.

“On Rishi Sunak’s watch, a record number of people are out of work due to long-term sickness at terrible cost to them, to business and the taxpayer, and we remain the only G7 country whose employment rate still isn’t back to pre-pandemic levels.

“Labour’s plan will get Britain working by cutting NHS waiting lists, introducing a new national jobs and careers service, making work pay and supporting people into good jobs across every part of the country.

“It’s time to stop the chaos, turn the page and start rebuilding Britain.”

Liberal Democrat Treasury spokesperson Sarah Olney said: “This Conservative carousel of chaos has our economy on a rollercoaster ride and the British people are sick and tired of it – it’s time for a change.”