UK Wage Growth Slows to Two-Year Low, Strengthening Case for Early BoE Rate Cut

British wage growth cooled to its weakest pace since mid-2022, while unemployment ticked higher, reinforcing expectations that the Bank of England (BoE) could deliver its first rate cut earlier than previously anticipated.

Pay Growth Loses Momentum but Hiring Shows Signs of Stabilization

Data from the Office for National Statistics (ONS) on Tuesday showed average weekly earnings excluding bonuses rose 4.7% year-on-year in the June–August period, marking the slowest growth since May 2022 and slightly below July’s 4.8%. The reading was broadly in line with economists’ forecasts.

The ONS added that payrolled employees increased by 10,000 between July and August, the first notable rise in nearly a year, before slipping by the same amount in September according to preliminary data. Officials said that after months of weak hiring, “the falls we have seen in both payroll numbers and vacancies are now levelling off,” suggesting that the downturn in the labor market may be bottoming out.

Markets Bring Forward Rate-Cut Bets

The softer wage figures fueled speculation that the BoE will cut interest rates sooner than expected. Traders now see a 25-basis-point reduction in March 2026, pulled forward from April, with a second cut priced in by year-end.

The BoE held rates steady at 4% in September, citing lingering inflation risks but acknowledging signs of easing labor market pressures. Slower wage growth could provide the central bank with more room to maneuver amid an economy struggling to regain momentum.

Unemployment Edges Higher; Sterling Falls

The unemployment rate rose to 4.8% in the three months to August, up from 4.7% in the prior period. While the increase was modest, ONS officials noted that the underlying survey remains subject to revisions.

The British pound weakened sharply after the data, falling more than half a cent against the U.S. dollar and sliding against the euro as investors recalibrated rate expectations.

Private Sector Pay Softens; Inflation Concerns Persist

In the private sector, earnings excluding bonuses rose 4.4%, the slowest pace since late 2021. Including bonuses, pay grew 5.0%, slightly above forecasts but still indicating a broader cooling trend.

Despite the moderation, some BoE policymakers have warned that wage pressures remain elevated enough to sustain inflation above target. BoE policymaker Megan Greene noted that the hit to the job market from Chancellor Rachel Reeves’ increase in employers’ social security contributions has largely played out since taking effect in April.

Job Vacancies Continue to Decline

Job openings fell by 9,000 in the July–September period to 717,000, extending a downward trend but suggesting that labor demand is stabilizing.

Overall, the data reinforce expectations that the BoE could pivot to easing in early 2026 if wage and inflation pressures continue to subside. Still, officials are likely to remain cautious until clearer evidence emerges that the labor market slowdown is translating into sustainably lower inflation.