(Bloomberg) -- UK wage growth slowed less than expected in the fourth quarter, underscoring the Bank of England’s caution against moving too quickly to cut interest rates. 

Wages excluding bonuses rose 6.2% from a year earlier, down from an upwardly revised 6.7% in the three months through November, the Office for National Statistics said Tuesday. Economists had forecast a reading of 6%. 

While that provides some relief for workers after the worst the cost-of-living crisis in a generation, the figures suggest the labor market isn’t cooling fast enough to satisfy policymakers worried about price pressures. Inflation is widely forecast to hit the 2% target in the spring, albeit briefly, but money markets expect the BOE to hold interest rates at a 16-year high until the summer.

Unemployment ticked down to 3.8% as more people dropped out of the workforce and into inactivity, driven again by rising numbers of long-term sick. The tight labor market is fueling higher pay and, with the majority of wage settlements in the UK agreed by April, the coming months will be key for Bank of England Governor Andrew Bailey’s calculus on interest rates. 

Money markets are wagering on two quarter-point cuts in 2024 with a 90% chance of a third, which compares to as many as six at the end of last year. The first such reduction is expected to come in August, a significant push back from May which was fully priced as recently as a month ago. The jobs data boosted the pound to a six-month high against the euro of around 0.85109.

Gilts dropped at the open, with the 10-year yield climbing as much as four basis points to 4.09%, the highest level since early December. UK bonds have sold off consistently through the start of the year, underperforming global peers, as better-than-expected economic data led traders to unwind the deep cuts that had been priced.

What Bloomberg Economics says...

“The main takeaway from the latest batch of jobs data is that wage pressures are easing but probably not quite as quickly as the Bank of England had hoped. We are sticking with our view that the first cut will come in May – the inflation data between now and then is likely to be consistent with a fall below the 2% target in the spring. But there is an increasing risk that the central bank pulls the trigger on the first rate cut later than we expect.

—Ana Andrade and Dan Hanson. Click for the full REACT

With wages now growing faster than prices, households are enjoying a return of real spending power. Regular pay adjusted for CPI inflation rose 1.9% in the fourth quarter from a year earlier. It was the strongest growth since July 2019, excluding the pandemic period.

That’s a potential boost for Prime Minister Rishi Sunak in a week when his Conservative Party is bracing for losses in two special elections on Thursday. Chancellor of the Exchequer Jeremy Hunt is preparing for his annual budget next month, which many Tories view as another chance to cut taxes and lift their flagging poll numbers. 

“It’s good news that real wages are on the up for the sixth month in a row and unemployment remains low, but the job isn’t done,” Hunt said in a statement after the labor data. “Our tax cuts are part of a plan to get people back to work so we can grow the economy — but we must stick with it.”

The UK is awaiting fourth-quarter GDP data on Thursday that will confirm whether the economy slipped into a technical recession — defined as two consecutive quarters of contraction — in the second half of last year. During an appearance in the East Midlands on Monday, Bailey said that any recession would be “shallow” and that the economy was now showing signs of an upturn. 

The labor market data kick off a week a crucial economic data in the UK, with attention focused on inflation figures Wednesday that are expected to show price-growth ticking higher in January due to base effects and higher air fares. Both economists and the BOE expect CPI to drift back to target in the second quarter. 

“Solid UK employment data with stronger wages growth than initially estimated that should back expectations that second round effects will keep the BoE on hold until the summer,” said Roberto Cobo Garcia, head of G-10 FX strategy at Banco Bilabo Vizcaya Argentaria SA in Madrid. An upward surprise in CPI data due on Wednesday could give a further boost to the pound against the dollar and the euro, he added.

Economists are cautioning against placing too much weight on the unemployment data due to ongoing quality concerns. The ONS’s labor force survey was suspended in October due to a falling response rate, and it is likely to be months before the problems are fully resolved. 

“It is clear that growth in employment has slowed over the past year,” said Liz McKeown, the ONS’s director of economic statistics. “Over the same period the proportion of people neither working nor looking for work has risen, with historically high numbers of people saying they are long-term sick.”

Tuesday’s wage data showed that the growth in private-sector pay, which is also being closely watched by the BOE for signs of sticky inflation, remains too high for comfort. Although the 6.2% reading was the weakest for regular private-sector pay growth since summer 2022, it is higher than the bank is comfortable with. 


--With assistance from Naomi Tajitsu, James Hirai and Alice Gledhill.

(Updates with new data, markets, Bloomberg Economics reaction)

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