UK wage growth eased in the three months to August to its slowest pace since the pandemic, making a case for the Bank of England (BoE) to cut interest rates further before the end of the year.

In the three months leading up to August, pay growth excluding bonuses decreased to 4.9%, down from a previous rate of 5.1%. This marks the slowest pace of wage growth since June 2022. When bonuses are included, annual wage growth fell to 3.8%, down from 4% and slightly surpassing economists' expectations of 3.7%. It was the slowest pace of growth since November 2020.

This data is closely watched by the financial markets, as it will influence how quickly the Bank can lower UK interest rates.

The BoE has been closely monitoring wage growth, particularly amid concerns that sustained increases could keep inflationary pressures high, especially in the labour-intensive services sector.

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While higher wages provide consumers with greater disposable income, enabling increased spending on goods and services, the recent moderation in pay growth – down from last summer's peaks of around 8%– indicates that the Bank’s aggressive rate hikes may be effectively curbing inflation.

Ashley Webb, UK economist at Capital Economics, said: "The further fall in wage growth in August, together with some signs that the labour market continued to loosen gradually, adds further support to widespread expectations that the Bank of England will cut interest rates from 5.00% to 4.75% at the next policy meeting in November."

But earnings growth continues to outstrip inflation, as pay increased by 2.6% in the three months to August with Consumer Prices Index inflation taken into account.

Markets are now seeing an 85% chance that the BoE will cut rates in November, higher than Monday's 83%.

Luke Bartholomew, deputy chief economist at abrdn, said that “for now, another interest rate cut in November looks nailed on”.

In August, the BoE cut interest rates for the first time since the pandemic, and market analysts anticipate at least one additional rate cut by the end of the year.

Alice Haine, personal finance expert at Bestinvest, said: "Constantly shifting budget speculation may be creating anxiety for consumers and businesses alike, but there may be some hope ahead if the Bank of England pushes ahead with a second interest rate cut in November.

"A cooling jobs market, slowing pay growth and inflation expected to dip below 2% on Wednesday, certainly raise the chances of further monetary policy loosening when central bank policymakers next meet in November.

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“A further 25 basis-point interest rate cut would ease the pain for those burdened by heavy debt and mortgage repayments, but it won’t ease worries about tax hikes and job security – another concern for households trying to balance the books.

The jobless rate fell to 4% between June and August, down from the previous figure of 4.1%, the Office for National Statistics (ONS) said.

Employment growth significantly outpaced forecasts, with 373,000 more people employed compared to the previous three months, surpassing the 240,000 estimate.

David Freeman, head of the ONS labour market and household division, said: “Pay growth slowed again, with last year’s one-off payments made to many public sector workers continuing to affect the figures for total pay.

“However, earnings continue to rise faster than inflation.”

“Vacancies have fallen once more, with most industries seeing a fall on the quarter,” he added.

Vacancies in the UK decreased by 34,000 in July to September, to 841,000. That’s the 27th drop in a row, as the hiring boom following the Covid-19 lockdowns continues to fade.

In June to August, the highest employment rate in the UK was in the South West (78.8%) and the lowest was in Wales (69.8%), the Office for National Statistics reports.

The highest unemployment rate was in the North East (5.6%) and the lowest was in Northern Ireland (1.9%).

The highest economic inactivity rate was in Northern Ireland (28.5%) and the lowest was in the South West (18.6%).

Inflation numbers will be published tomorrow, another set of data that is even more closely monitored by the Bank of England and markets, given its weight when deciding the path for interest rates.

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