Fresh evidence that pay pressures in the UK economy are finally easing has strengthened expectations that the Bank of England will lower interest rates again this week, offering potential relief to households and businesses after years of elevated borrowing costs.
Figures published on Tuesday by the Office for National Statistics (ONS) revealed that wage growth in the private sector continued to slow in the three months to October, falling to its weakest pace in almost four years. At the same time, unemployment climbed to its highest level since 2021, reinforcing signs that the labour market is cooling after a prolonged period of tightness.
Together, these developments have fuelled confidence among economists and financial markets that policymakers now have enough evidence to justify cutting the base rate when the Monetary Policy Committee (MPC) meets on Thursday.
Wage Growth Loses Momentum
According to the ONS, annual growth in regular private sector pay excluding bonuses eased from 4.2 per cent to 3.9 per cent over the three-month period. This marks the slowest rate of increase since late 2020, when the economy was still grappling with the effects of the pandemic.
While pay growth remains above the Bank of England’s long-term comfort zone, the direction of travel is encouraging for policymakers who have been concerned that stubborn wage inflation could keep overall price growth elevated.
The data also showed that the unemployment rate rose to 5.1 per cent, a four-year high, suggesting that employers are becoming more cautious about hiring as economic momentum fades. Vacancies have been drifting lower for months, and redundancies have picked up in some sectors, particularly retail, construction and parts of manufacturing.
For the Bank, which has repeatedly stressed the importance of labour market conditions in shaping inflation, the combination of slower wage growth and rising unemployment is likely to carry significant weight.
A Key Obstacle to Rate Cuts Begins to Ease
Persistent pay growth has been one of the biggest frustrations for policymakers over the past two years. Even as headline inflation fell sharply from its post-pandemic peak, strong wage settlements continued to push up service-sector prices, making it harder for the Bank to declare victory over inflation.
Annual growth in regular pay peaked at 7.8 per cent in mid-2023 and has since moderated only gradually. That stickiness has contributed to UK inflation remaining higher than in the United States and much of Europe, as well as above the Bank’s 2 per cent target.
As a result, the Bank of England has moved more cautiously than some of its international peers, keeping interest rates higher for longer in an effort to ensure inflationary pressures are fully brought under control.
However, the latest figures suggest that the long-awaited cooling in the jobs market may now be taking firmer hold.
James Smith, a developed markets economist at ING, said the data pointed to a meaningful shift in the UK’s inflation outlook.
“Slowing wage growth combined with clearer signs of cooling in the labour market suggests the UK is becoming less of an inflation outlier,” he said. “A rate cut on Thursday looks highly likely, and we expect two additional cuts during the first half of 2026.”
Markets Brace for a Near Certain Cut
Financial markets are already pricing in a quarter-point reduction in the base rate this week, which would lower it from 4 per cent to 3.75 per cent. Traders see the move as almost inevitable, barring a major surprise in inflation data due on Wednesday.
The decision will be taken by Governor Andrew Bailey and his fellow MPC members, who have been split in recent months over how quickly to ease policy. Some officials believe inflationary pressures have cooled sufficiently to allow rates to come down while still remaining restrictive. Others argue that risks remain, particularly in services inflation and public sector pay.
That division is likely to be reflected in Thursday’s vote, even if the overall outcome points to a cut.
Public Sector Pay Remains a Concern
While private sector wages are losing momentum, the picture is less reassuring in the public sector. The ONS figures showed that annual growth in public sector pay accelerated sharply, rising from 6.6 per cent to 7.6 per cent.
This increase reflects generous pay deals agreed earlier in the year, particularly in healthcare, education and parts of the civil service, following prolonged industrial disputes. Although these settlements are largely backward-looking, they add to concerns that elevated pay growth could linger in some areas of the economy.
For the MPC, the divergence between private and public sector wages complicates the picture. While market-driven pay appears to be cooling, government-funded wage increases may continue to support consumer spending and keep some inflationary pressures alive.
Inflation Data Holds the Final Clue
The next major piece of the puzzle will arrive on Wednesday, when the ONS publishes consumer price inflation figures for November. Economists expect inflation to remain above the Bank’s 2 per cent target but continue its gradual downward trend.
If inflation surprises on the upside, it could strengthen the arguments of more hawkish policymakers who are wary of cutting rates too quickly. Conversely, a softer-than-expected reading would all but seal the case for a cut this week.
Thomas Pugh, chief economist at RSM UK, said the latest wage data would provide reassurance to the Bank, even if it does not give a green light for aggressive easing.
“The slowdown in private sector regular pay growth to its lowest level since the pandemic will help convince the MPC that the disinflationary process is still underway,” he said. “That will probably be enough to persuade Governor Bailey to vote for a cut on Thursday.”
However, Pugh cautioned that wage growth remains too high for policymakers to become complacent.
“Total pay growth is still running faster than the Bank would like,” he added. “That will limit how far and how fast interest rates can fall next year.”
What It Means for Households and Businesses
A rate cut would be welcome news for millions of mortgage holders, many of whom have faced sharply higher monthly payments since rates began rising in late 2021. While borrowing costs would remain high by historical standards, even a modest reduction could ease pressure on household budgets.
Businesses, particularly small and medium-sized firms, would also benefit from lower financing costs as they grapple with weak demand and rising operating expenses.
Nevertheless, economists warn that rate cuts alone will not be enough to revive growth quickly. The UK economy remains fragile, with consumer confidence subdued and investment constrained by global uncertainty.
A Cautious Path Ahead
Even if the Bank of England lowers rates this week, officials are expected to emphasise that policy will remain restrictive for some time. The MPC is keen to avoid repeating past mistakes by easing too soon and allowing inflation to re-accelerate.
For now, though, easing wage growth and a softening labour market have shifted the balance of risks. After months of hesitation, the conditions for a December rate cut finally appear to be in place offering a tentative sign that the long battle against inflation may be entering its final phase.