The British Pound saw an uptick after UK wages rose more than expected in October. According to data from the Office for National Statistics (ONS), regular pay excluding bonuses increased by 5.2%, up from 4.9%, exceeding the anticipated 5%. When including bonuses, wage growth was 5.2%, surpassing the forecast of 4.6%. This positive data helped push the Pound to Euro exchange rate to 1.2080 and also contributed to a rally in the Pound to Dollar rate, reaching 1.2692.
The wage growth figures indicate that inflationary pressures are continuing, which will likely keep inflation rates above the Bank of England’s 2% target. The increase in wages, particularly with bonuses included, suggests a higher cost of living, leading businesses to raise prices, which could further drive inflation. These developments have resulted in higher bond yields and a change in market expectations, particularly regarding the future direction of interest rates.
Following the release of these figures, the financial market has adjusted its predictions, lowering the anticipated frequency of interest rate cuts by the Bank of England in 2025. Michael Brown, Senior Research Strategist at Pepperstone, noted that the acceleration in earnings growth was largely driven by a base effect from 2023 and higher public sector pay deals from this summer, which are feeding into the data.
Despite wage growth, the UK unemployment rate remained steady at 4.3%, while the number of job vacancies dropped by 3.7% in the three months leading to November. Additionally, the number of payrolled employees fell by 35,000 in November, following a smaller decrease in October. The labour market is showing signs of cooling, but the pace of change remains gradual. Lindsay James, investment strategist at Quilter Investors, observed that businesses are facing higher employment costs due to a recent rise in national insurance, which may result in more cautious hiring practices and slower wage increases.
Economists predict that businesses will be more conservative in hiring as they adjust to the new payroll tax increases introduced in October. This trend is already reflected in the December S&P Global PMI survey, which reported the fastest job losses in the private sector since the financial crisis, excluding the pandemic period. Service sector companies, in particular, saw a notable decline in employment, primarily due to voluntary departures not being replaced, driven by rising employment costs.
The Bank of England is set to announce its next policy decision on Thursday. It is widely expected to hold interest rates steady in light of recent developments, including signs that inflation may rise to 3% and continued wage pressures. This could limit the Bank’s ability to offer significant relief to the public through interest rate cuts in 2025. However, this situation supports the Pound, as it suggests that UK interest rates will likely remain higher than those in the Eurozone and most other countries, except the U.S. As a result, while GBP exchange rates remain relatively positive, the Pound to Dollar rate continues to face challenges.
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