Bah Humbug! Has Rachel Reeves spoiled Christmas?
It’s not just about the swap rates jump after the Labour tax and spend budget at the end of October. It’s also about things like the massive public sector pay rises handed out by the new government – which are trickling into the inflation data. That data shows that there is increasing pressure on the Bank of England to keep rates steady – rather than giving us all a welcome Christmas mortgage rate reduction gift.
Following the Labour budget, wage growth in the UK has picked up speed, reaching 5.2% in the three months leading up to October. This unexpected increase has intensified concerns about persistent inflation as the Bank of England prepares for its final interest rate decision of the year this Thursday.
Read more: "Christmas is for wimps" – is it time to channel your inner Gordon Gecko?
New data from the Office for National Statistics (ONS) has revealed that regular pay, excluding bonuses, rose from 4.9% to 5.2% between August and October. This marks the first acceleration in wage growth in eight months, defying both economists’ forecasts and the Bank’s predictions that the rate would remain unchanged.
Including bonuses, average earnings also rose to 5.2%, up from 4.6% in the prior quarter. Meanwhile, the unemployment rate remained steady at 4.3%, aligning with expectations.
According to Liz McKeown, the ONS's director of economic statistics, private sector wages were the main driver of this rise, increasing from 4.9% to 5.4%. By contrast, public sector pay growth fell from 4.7% to 4.3%. McKeown noted that wage growth had also been amplified by “base effects”, referencing a decline in earnings during the same period last year.
Read more: What will happen to the UK housing market in 2025?
The report arrives just ahead of the Bank of England’s decision on interest rates, where policymakers are now expected to keep rates unchanged at 4.75%. The latest wage figures are likely to reinforce concerns among some members of the Bank’s monetary policy committee about ongoing inflation risks stemming from the tight labour market.
“Today’s data will strengthen the Bank’s narrative of gradualism and caution as we head into the new year,” said Sanjay Raja, UK economist at Deutsche Bank told The Times.
Financial markets currently anticipate four rate cuts from the Bank of England during 2025, which would bring the base rate down to 3.75%. This projection reflects a slower pace of easing compared to expectations for the eurozone and the US.
Private sector wages have now risen by 5.6% on a three-month average, exceeding the Bank’s year-end estimate of 4.9%. When adjusted for inflation, real pay for UK workers rose by 2.2% over the same period.
However, the Bank maintains that wage growth will need to decline to between 3% and 4% to meet its 2% inflation target. Official inflation data, due on Wednesday, is expected to show a further increase in the annual consumer price index for November, surpassing the 2.3% recorded in October.
The outlook for pay remains uncertain following government measures to raise the national living wage and hike employer national insurance contributions, both set to take effect on April 1 next year.
Despite the uptick in wages, other indicators point to a softening labour market. Employment levels have remained broadly static, while job vacancies fell by 39,000 to 818,000 in the most recent month – marking a prolonged decline of more than two years but still above pre-pandemic levels.
Further signs of labour market cooling emerged as monthly payroll estimates showed a decline of 35,000 in November, a steeper fall than the 5,000 recorded in October and exceeding forecasts of a 10,000 drop. This marks the third drop in four months, reflecting weaker recruitment activity during the latter half of the year.
The ONS also reported a decline in economic activity to 21.7%, down over the past year, but cautioned that recent figures might have been overstated.
The reliability of UK labour market data has faced scrutiny over the past year due to reduced survey participation rates. The ONS has struggled with lower response rates, which have fallen from over 35% before the pandemic to as little as 13%, forcing the Bank to rely on alternative employment measures. A redesigned Labour Force Survey, including online components, is planned for 2027.
“This month we have reweighted the Labour Force Survey with updated population data, which has improved the coherence between different data sources,” McKeown explained. “However, we continue to advise caution when interpreting this dataset while improvements made to the survey continue to work fully through.”
But even if this does feel a little bit gloomy, at least 2025 may be better. “I think 2025 for me feels a lot feels a lot more optimistic and I think We're going to see a lot more activity,” Sara Tucker from The Mortgage Mum told Mortgage Introducer.
