Markets underpricing summer UK rate cut as jobs market cools

Wage growth is proving sticky, albeit the latest data was a tad below consensus. Private-sector wage growth is rising at 5.8% year-on-year and on a month-on-month basis is still showing decent momentum. Some of that is potentially linked to the recent 10% rise in the National Living Wage, though we think the overall impact of this policy change won’t be huge.

Again there are some doubts over the data quality here. It’s not directly affected by the same sampling issues as the unemployment data, but policymakers are concerned that one-off cost of living payments that were paid 12-18 months ago were wrongly accounted for as permanent increases in pay. When those payments weren’t repeated this past winter/spring, in theory, this would show up in the data as an artificial slowdown in wage growth. While it’s hard to say how much of the recent fall in pay growth is linked to this, the Bank has said that increased volatility in these wage numbers means it’s paying less attention to them than it was just a few months ago.

So when it comes to the near-term direction of interest rates, next week’s inflation data, due a day ahead of the June policy meeting, will be much more important. Services inflation shocked to the upside in April’s data, but this was heavily linked to volatile one-off price hikes at the start of the financial year. We think May’s numbers should be less surprising, and we think the Bank is lining up for a rate cut at the August meeting.