Accelerating Pay Calls Bank of England Rate Cut into Question

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A monthly labour market survey reports the fastest rise in permanent pay for eight months, underpinning a Bank of England policymaker's warning that an August rate cut is not warranted.

The KPMG/REC Report on Jobs showed the fastest rise in permanent pay for eight months, which could bolster arguments on the Bank of England's Monetary Policy Committee that it is too soon to cut interest rates.

Wages are considered a key driver of domestic inflation, and the REC's findings suggest the Bank must proceed cautiously.

"We favour a later start to the rate cutting cycle in September because there is uncertainty around the strength of the labour market and services inflation is still very high," says Kristina Clifton, an analyst at Commonwealth Bank.

The REC wage data comes a day after the Bank of England broke its pre-election period of silence, with MPC member Jonathan Haskel saying he thinks an interest rate cut this summer would be premature. He told an audience at King's College London he would "rather hold rates" steady at 5.25%.

Haskel said he is still concerned that the jobs market "continues to be tight," which would create the environment for wage increases and potentially fuel inflation.

Despite the wage uptick, the REC says there are signs the labour market is still easing, which could put a September rate cut in play.

"Given the overall slowdown in hiring and increasing labour availability it’s hard to be that concerned about the firming of wage deals in this release," says Sam Hill, Head of Market Insights at Lloyds Bank.

It was found that permanent staff appointments continued to fall in June, and the rate of contraction accelerated to the steepest for three months amid reports of a lack of demand for staff.

There was also evidence that the general election had caused some uncertainty and acted as a brake on recruitment activity.

Advocates for keeping interest rates steady might argue at the August policy meeting that it would be prudent to watch for any post-election pick-up in activity before cutting interest rates.

That said, it is clear the market will likely ease from here. The REC found that the availability of candidates to fill roles continued to increase in June, extending the current period of growth to 16 months.

Permanent and temporary staff availability both rose sharply, though in each case to lesser degrees than in May.

Recruitment consultants reported that the latest increase in the supply of staff reflected a combination of redundancies, slow decision-making amongst clients and a lower number of job openings.