Goldman Sachs economists said that given the robust labor market and rising wage pressures, the Central Bank of England is likely to postpone monetary policy easing at a later time. Economists now predict that an interest rate cut will occur at the Central Bank's June meeting. They had previously expected the rate to be cut at the May meeting.
Last week, the Office for National Statistics (ONS) said that from October to December 2022, the unemployment rate (for those aged 16 years and over) decreased by 0.2% compared to the previous three-month period (through September), and amounted to 3.8% (the lowest value since the period between February and April 2023). Meanwhile, the number of unemployed individuals fell by 87.0 thousand to 1.32 million. The economic inactivity rate was largely unchanged in the latest quarter (21.9%) but increased by 1.4% compared to the same period in 2022. The data also showed that from October to December, the growth in average total pay (including bonuses) and regular pay (excluding bonuses) was 5.8% per annum (+6.7% in November) and 6.2% per annum (+6.7% in November). Economists had expected an increase by 5.6% and 6.0%, respectively. However, economists warned that the slowdown in wage growth is likely to be not significant enough for the Central Bank to ease monetary policy in the near term.
At its February meeting, the Bank of England (BoE) left the interest rate at 5.25%, but two Monetary Policy Committee (MPC) members preferred to raise the rate by another 25 basis points and one member preferred to cut it by 25 basis points. Meanwhile, Central Bank Governor Andrew Bailey stated that the BoE has to keep monetary policy sufficiently restrictive for sufficiently long, noting that how long that will be and how high rates have to stay depends on incoming data.
"We see a 25% risk that the Bank of England will eventually wait longer before starting to cut rates and then act more gradually, given the possibility of continued slow wage growth and core inflation in the service sector. Our main scenario provides for five consecutive rate cuts of 0.25% this year and a final rate of 3% in June 2025," Goldman Sachs said.