(Bloomberg) -- UK wage growth slowed at the sharpest pace in almost two years, a further sign that the labor market is cooling in response to a flagging economy.

Average earnings excluding bonuses rose 7.3% in the three months through October compared with a year ago, the Office for National Statistics said Tuesday. That’s down from an upwardly revised 7.8% in the period through September. Economists had expected a figure of 7.4%.

The figures will bolster arguments that the Bank of England may have done enough to rein in inflationary pressures coming from the labor market after delivering the most aggressive series of interest-rate increases since the 1980s. 

The central bank is expected to keep rates at a 15-year high of 5.25% for a third straight meeting this week. But the tightness of the labor market and still-rapid wage growth could hold up a shift toward rate cuts.

“While momentum has weakened, the labor market is still tight,” said Yael Selfin, chief economist at KPMG UK. “The Bank of England will remain alert as continued tightness could cause a setback in its battle against inflation, particularly if strong wage growth contributes to persistence in domestic inflation.”

The softer-than-forecast wages data led the pound to briefly pare gains versus the dollar before resuming its 0.2% advance to $1.2583. Traders added to bets the BOE will cut rates after slightly paring them on Monday. Investors have fully priced in three quarter-point reductions by the end of next year, with the first decrease in June.

What Bloomberg Economics Says ...

“The slowdown in wage growth in the latest jobs market data is unlikely to change the Bank of England’s view that it is too soon to discuss rate cuts. Pay gains are falling but are still well in excess of levels that are consistent with the central bank’s 2% inflation target and the jobs market remains tight by historical standards.”

—Ana Andrade and Dan Hanson, Bloomberg Economics. Click for the REACT.

“While annual growth in earnings remains high in cash terms, there are some signs that wage pressure might be easing overall,” Darren Morgan, ONS director of economic statistics, said. “However, as inflation has been falling more quickly, pay continues to grow in real terms.”

Expectations for rate cuts have built as inflation cools and the economic outlook worsens, not only in the UK but in other major economies where elevated interest costs are eating into the spending power of consumers.

Chancellor of the Exchequer Jeremy Hunt endorsed the figures as a sign price pressures are easing, one of the key measures the government has put at the heart of its agenda.

Hunt said it was “positive” to see inflation falling and real wages growing. “At the Autumn Statement, I announced an ambitious set of measures to get more people into work and boost economic growth,” he said. Even so, it’s not likely to lead to relief on interest rates until later in 2024.

“Improving labor market data from the perspective of the BOE, but still too strong overall to suggest that monetary policy will start to be eased any time soon,” said Stuart Cole, chief macro economist at Equiti Capital in London. “It likely leaves the BOE at this week’s meeting in something of an impasse, forced to continue resisting pressure to lower rates in support of a slowing economy and choosing instead to keep policy tight as it struggles to bring CPI and wages growth back under control.”

Recent questions over the reliability of the UK labor market statistics have complicated the task facing the BOE as it tries to assess just how quickly the labor market is loosening. It’s left policy makers relying on a range of indicators, including a key REC-KPMG survey that shows firms bearing down on pay costs and hiring last month. 

For now, the ONS is producing “experimental” estimates for unemployment, employment and inactivity after it was forced to suspend its Labour Force Survey due to a falling response rate. 

Based on these figures, the jobless rate was unchanged at 4.2% in the three months through October. The number of people in work rose 50,000 from the three months through July and inactivity — those neither in a job nor looking for one — was unchanged from the previous period.

Beyond slowing pay growth, the broader job figures pointed a cooling labor market. Vacancies fell by 45,000 on the quarter to 949,000, the 17th consecutive fall and the longest consistent period of decline on record. Vacancies are still 140,000 above pre-pandemic levels, however.

“The labor market is continuing to cool but isn’t crashing,” said Tony Wilson, director of the Institute for Employment Studies. “Employment remains steady, unemployment is flat and there are still nearly a million vacancies in the economy. Pay growth is also still strong, at above 7%, but tends to lag other indicators and so is likely to ease up in the coming months. This is all good news.”

Household finances were given a boost by regular real pay rising 1.2% in the three months through October, the fastest gains when adjusted by inflation in just over two years. However, pay is still clawing back the losses from a period of painfully high price growth.

Other data released by the ONS show:

  • Total pay growth including bonuses slowed to 7.2% from a revised 8% in the three months through September. That’s the biggest drop since the summer of last year
  • Private-sector regular wage growth slowed to 7.3% from a revised 7.9%
  • Public-sector pay growth slowed to 6.9% from a revised 7.4%
  • The number of employees on payrolls fell 13,000 in November to 30.2 million, real-time information based in tax authority records show. A rise of 5,000 was forecast by economists.
  • October payrolls were revised up to show an increase of 39,000 instead of 33,000

“Pay growth is still double the 3% to 3.5% that the MPC thinks is consistent with 2% inflation and it will take time to come down,” said Thomas Pugh, economist at leading audit, tax and consulting firm RSM UK. “That’s why we’re not expecting any cuts in interest rates until the second half of next year.”

The ONS said there were 131,000 working days lost to labor disputes in October 2023, three-fifths of which where in health and social care as doctors went on strike. The industrial action involved 49,000 workers, the lowest number since June 2022.

“Wage growth remains one of the key metrics for Bank of England rate setters and how persistent it proves into 2024 will be a key determinant for the timing of any monetary policy easing,” said Jack Kennedy, senior economist at hiring platform Indeed.

--With assistance from Harumi Ichikura, Joel Rinneby, Eamon Akil Farhat, Irina Anghel and Aline Oyamada.

(Updates with market reaction, comment and chart.)

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