“Today’s data provides the Bank of England with further tentative evidence that the recent energy shock is unlikely to lead to a renewed pick up in pay pressures. This is likely to strengthen the case for keeping interest rates on hold today and over the summer, especially given the recent decline in energy prices. Unlike 2022, the labour market is not a key source of inflationary pressure this time round, which may leave some MPC members more reluctant to tighten policy further, with risks increasingly tilted to the downside. We expect the Bank of England to keep interest rates unchanged this week.
“Headline wage growth held at 3.4% in April, but this largely reflected temporary upward pressure from public sector pay linked to timing effects. In contrast, private sector wage growth, a more timely indicator of underlying labour market strength, continued to ease, falling to 2.9%. Against a weak economic backdrop, workers are increasingly reluctant to push for higher pay, reducing the likelihood of second-round effects feeding through from the labour market into wider cost pressures. Forward looking survey evidence also suggests that firms do not expect to materially increase wage settlements over the coming year. We expect pay growth to continue to slow over the coming months.
“Unemployment fell to 4.9% in the three months to April. Higher input cost pressures in addition to weak domestic demand is forcing businesses to protect margins by slowing hiring plans and reducing headcount. This will likely see unemployment edging further upwards over the coming year.”
