Evaluating August Rate Hike Prospects: UK Wage Data Holds the Key

UK: wage data holds the key to size of August rate hike

With a month to go until the Bank of England’s August meeting, next week’s jobs data is one of only two datasets that are likely to have any bearing on its decision – the other being CPI on 19 July.

Policymakers will be watching regular pay growth (average earnings excluding bonuses), which has picked up again lately. The question is whether that’s solely down to firms implementing the 10% increase in the National Living Wage, or a genuine increase in pay pressures. Assuming it’s at least partly the former, then we think we could get a fractional fall in the annual rate of pay growth next week. Assuming we don’t get any unpleasant surprises from the CPI data in a couple of weeks' time, that would probably allow the Bank of England to pivot back to a 25bp rate hike in August. We expect a further hike in September, but come November, we are hopeful there should be sufficient improvement in the inflation story to merit a pause.

We’ll also get monthly GDP figures next week, but these will be heavily distorted by the extra bank holiday surrounding the King’s Coronation in May, so are unlikely to be of much relevance for the BoE. And even without the distortions, it's clear the Bank is firmly focused on inflation rather than growth right now.