The time to stop raising interest rates is now, say business lobby groups who fear the negative impact of another rise in the cost of borrowing on their members after the latest jobs figures showed pay rises including bonuses, rocketing to 8.5% a year.
Salaries have soared this year in response to rising inflation and remained stubbornly high, despite 14 consecutive interest rate rises by the Bank of England.
When the Bank’s monetary policy committee meets next week the pressure will be intense on its nine members to act again or risk further pay increases sending inflation higher next year.
Some Bank officials, those who, like the governor, Andrew Bailey, have signalled the end of the hiking cycle, will have hoped pay ticked down to show the medicine so far is working and the patient can escape without further treatment.
However, the measure of pay that excludes bonuses stuck at 7.8% in the three months from May to July, the same as the three months to June.
A respite from further interest rate rises is certainly what the Institute of Directors wants.
Kitty Ussher, its chief economist, said that although wage inflation “still feels high” there are special factor that have stopped it falling in line with recent declines in inflation.
She pointed to the spike in public sector deals that have sent pay, including bonuses across Whitehall, the NHS and the rest of the public services to a record high of 12.2%.
More emphasis should be put on regular pay in the public sector, which is much lower at 6.6%, and below the July inflation rate of 6.8%.
She added: “Private sector pay wage pressure, although also high, has grown at a lower rate in recent months and is likely to fall further as the labour market loosens and the headline rate of inflation comes down.”
The IoD’s surveys show the Bank’s large, half-a-point interest rate rise in June “led to a worsening in the way that business leaders considered the outlook for the economy”.
Yael Selfin, the chief economist at KPMG, said the labour market more broadly was showing clear signs of weakening as the economy slows in response to interest rate rises. Like most economists, she said the pay figures meant a quarter-point increase next week was inevitable, but argued there would be little to support further rises.
“The labour market is starting to feel the weight of slowing activity,” she said, highlighting how unemployment rate rose to 4.3%, vacancies were down below 1m, and job-to-job flows moderated, suggesting that workers are less confident when they consider moving to another employer.
Businesses fear that when the downturn comes – the one the Bank wants to slow rising wages and inflation – it will be an unstoppable recession. A hard landing that has been avoided so far in the US but appears to be heading for the UK.
