By Ed Frankl

Wage growth in the U.K. continued at a strong clip at the start of 2025, likely ensuring Bank of England policymakers will remain cautious as they mull dialing back interest rates in the months ahead.

Weekly pay excluding bonuses in the three months to January was 5.9% higher than a year earlier, matching the pace of the previous three-month period, the Office for National Statistics said Thursday. That comes after pay growth had risen for three straight months.

The BOE meets later Thursday, when it is widely expected to keep its key interest rate at 4.5%. Although it cut rates at its last meeting, the central bank has lowered borrowing costs more slowly than the European Central Bank, which earlier this month cut its deposit rate for the sixth time since the summer of last year.

With wage growth staying stubborn, the BOE will likely refrain from accelerating its rate cuts. Labor costs are a key contributor to services inflation, which rose to 5% in January from 4.4% in December.

BOE Gov. Andrew Bailey said at last month's policy meeting that policymakers would adopt a "gradual and careful" approach to rate cuts.

However, complicating the position for the BOE, the strong wage growth comes despite signs that the labor market is loosening somewhat.

Unemployment held at 4.4% in the three months to January, the same as the prior three-month period, but is still up from the 4% of the three months to August. Estimates of welfare claimants climbed by 44,200 on month in February. However, the ONS said increased volatility from recent smaller sample sizes of respondents means these estimates should be treated with some caution.

Employment as measured by the monthly PMI survey, which tracks private-sector businesses, showed employment dropping in February at a rate not seen since the 2008-09 financial crisis, if pandemic months are excluded. Elsewhere, a March jobs report by KPMG and REC said firms were pausing or paring back hiring plans due to the U.K.'s subdued economic outlook and increased employers' costs.

All this leaves the central bank in a tricky position, Capital Economics' deputy chief U.K. economist Ruth Gregory said.

"If the jobs market remains weak, then underlying price pressures should eventually fade markedly. But with wage growth still sticky, that will increase the bank's concerns about a resurgence in inflation," she said.

The prospect of spending cuts by the government in a budget statement later this month could tip more people into searching for employment. Though the U.K. also has longstanding issues of numbers outside the labor market, including around 2.8 million people inactive due to long-term sickness.

Additional economic concerns prompted by potential tariffs on European goods imports by U.S. President Trump could also weigh on firms' decisions to hire staff, particularly in the manufacturing sector.

Write to Ed Frankl at edward.frankl@wsj.com

(END) Dow Jones Newswires

March 20, 2025 03:44 ET (07:44 GMT)

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