Bank of England Awaits Further Wage Slowdown Before Easing Inflation Concerns

Bank of England Awaits Further Wage Slowdown Before Easing Inflation Concerns

The Bank of England (BOE) is expected to maintain its cautious stance on monetary policy as it monitors wage growth trends, a key driver of the U.K.’s persistent inflation. According to ING economist James Smith, although wage pressures are beginning to ease, they remain high enough to keep inflation at uncomfortable levels for policymakers.

New labor market data released Tuesday showed that average earnings excluding bonuses rose by 5.6% in the three months to March, slightly down from 5.9% in the previous period. While this marks a gradual decline, it still indicates that pay growth remains elevated compared to pre-pandemic norms.

“The U.K. labor market is slowing, not collapsing, and that’s coming through in a steady decline in wage growth,” Smith said. He emphasized that although the cooling trend is encouraging, it may not be enough to prompt immediate action from the central bank. “The BOE will be hoping that trend continues,” he added.

The central bank is particularly focused on services inflation, which tends to be closely tied to wage growth due to the labor-intensive nature of the sector. As long as wage-driven price pressures persist in services, BOE officials are likely to remain wary of cutting interest rates too soon.

However, there is growing speculation that the BOE could begin to ease policy as early as August, provided upcoming data shows a continued softening in both wage growth and inflation, particularly within services. Much will depend on whether inflation figures, due in the coming months, confirm that underlying pressures are abating.

For now, markets will be watching closely for further signs that the labor market is gradually rebalancing without tipping into a sharp slowdown, as this could open the door for the BOE to pivot toward more accommodative policy in the second half of the year.