Bank of England still likely to cut rates despite surging wages, says Bailey

Andrew Bailey, the Governor of the Bank of England, has indicated that the institution is still poised to lower interest rates again this year, despite a surge in pay growth and an expected rise in inflation. Speaking at an event in Brussels, Bailey addressed the recent labour market figures showing a significant increase in wage growth, suggesting they are unlikely to alter the Bank's policy direction: "Pay growth went up, but actually not quite as much as we were expecting," he remarked.

The Office for National Statistics (ONS) reported that regular pay growth in the private sector reached 6.2 per cent in the final quarter of the year, marking the highest level since November 2023. However, this figure was marginally below the 6.3 per cent forecast by Bank of England experts, as reported by City AM.

Bailey referred to the Bank's forward-looking survey on pay pressures, which indicates that wage pressures are expected to diminish over the next year: "One of the best anchors we have is the survey that our agents around the country do every year, and they think settlements this year are going to come down," he explained.

The Bank of England projects that annual wage growth will decrease to 3.7 per cent across 2025, from 5.3 per cent for the current year. "I don't think we saw anything this morning that fundamentally changes that," Bailey added.

His comments precede the release of the latest inflation figures, set to be published tomorrow morning. Analysts in the City predict that the headline rate will increase to 2.8 per cent, driven by recovering services prices.

The Bank's projections indicate that inflation will climb to 3.7 per cent later in the year, primarily due to escalating energy prices.

Bailey clarified that this surge in inflation does not signify "a story about the fundamental state of the economy," as it largely mirrors changes in regulated prices, such as energy bills.

He further noted that the inflation hike would occur against "a background...which is weaker in growth terms than we thought it would be" which should curb its longevity. Earlier this month, the Bank of England reduced interest rates for the third time, lowering the Bank Rate to 4.50 per cent.