- The BoE maintained its base interest rate at 5.25% for the fifth time in a row in March
- The BoE is closely monitoring wage growth in the fight against inflation
- Slowing wage growth and a subdued economy are contributing to hopes for interest rate cuts
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Expectations for impending interest rate cuts were raised on Monday after research showed that the growth in salaries of new starters is declining.
Salaries for new full-time workers rose at the weakest pace in more than three years in March, while agency wages rose at the slowest pace in four months, according to a report from KPMG and the Recruitment and Employment Federation.
High wage growth has been closely monitored by the Bank of England, which has repeatedly warned over the past 18 months about the possibility that a wage-price spiral could hamper its fight against inflation.
The Bank of England maintained its base interest rate at 5.25% for the fifth time in a row in March
The KPMG and REC report also shows that permanent UK hires have been made every month over the past year and a half, with recruiters surveyed highlighting ‘uncertain economic prospects and ongoing hiring freezes’.
Budget constraints also reportedly weighed on broadcast billings in March, which fell to the steepest decline since July 2020, according to the report.
Neil Carberry, chief executive of the REC, said: ‘Today’s data shows the economy is in a holding pattern, waiting for inflation and interest rates to ease so businesses can start investing.
The data here should support a decision by the Bank of England’s Monetary Policy Committee to loosen its grip on growth in the near future
‘The decline in permanent placements has been steady for several months, with temporary recruitment remaining robust, even if falling back from the record highs of 2022/203. Employers seem to rely on temporary work, while they are uncertain about the course of the economy.
‘The data here should support a decision by the Bank of England’s Monetary Policy Committee to loosen its grip on growth in the near future. Wage growth has slowed significantly and is now below the survey’s long-term average for new permanent positions.”
At the most recent MPC meeting in March, the BoE again kept interest rates at 5.25 percent.
That decision marked the fifth straight break after that Fourteen consecutive increases in the base rate since December 2021.
The BoE hinted last month that key interest rates could fall in the coming months, with the next meeting set to take place on May 9.
At the March meeting, one member of the MPC voted for a rate cut, while all others voted for a pause. This marked a significant shift from the previous meeting, when two members wanted further interest rate increases.
David Morrison, senior market analyst at Trade Nation, told This Is Money about this The shift had paved the way for the first rate cut that would take place after the June meeting.
He said: ‘The consensus expectation is that the Bank will cut rates by 25 basis points (to 5 percent) in June, and then implement a further 50 basis points of rate cuts by the end of the year.
“If so, it would lower the bank rate to 4.5 percent, which would be the lowest level since May 2023.”
Inflation peaked at 11.1 percent in October 2022, but has since fallen to 3.4 percent in February.
Victoria Scholar, head of investments at Interactive Investor, said the central bank will pay close attention to the latest inflation and wages data due later this month.
The bank will look for clues “to the strength of ongoing price pressures in the economy,” she added, but will be keen to avoid raising rates too quickly.
Scholar said: ‘The Bank of England remains concerned about inflation in the services sector, which is rising well, and wage growth which remains high. Both could increase domestic price pressures, which is why the central bank is taking its time before cutting rates.
‘Markets expect about a 75 percent chance of the Bank of England’s first rate cut in June, with a more than 20 percent chance of a cut in May.
“However, if April inflation data turns out to be warmer than expected, the central bank could delay the first rate cut of this cycle until August or possibly even later.
Analysts at UBS Global Research believe the BoE will wait until August after reversing its forecasts from May last month.
‘Markets are pricing in around three rate cuts by the end of the year, with further cuts in 2025, thanks to the steady downward trend in inflation data.
“Inflation is expected to fall below the 2 percent target in the second quarter of this year, towards 1.5 percent in June.”