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UK businesses expect inflation and wage growth to moderate, according to a monthly survey by the Bank of England, providing some relief to policymakers ahead of an interest rate decision later this month.
Output prices are expected to rise by 4.9 percent over the next 12 months, according to August decision maker dashboard, A closely watched survey of the UK’s chief financial officers, published on Thursday. The figure, which is based on a three-month average, represents a decline of 0.5 percentage points from July and well below the peak of 6.6 percent in September last year.
Forecasts for wage growth also fell to an average of 5.1 percent, continuing a downward trend from a high of 6 percent at the end of 2022.
James Smith, an economist at ING, said the data provided “good news” for the central bank’s interest rate-setting committee. He added: “With two weeks to go until the Bank of England’s next interest rate decision, there is a growing sense that the rate hike cycle has reached its peak and further support for this story has been provided by the latest data from the Committee of Policymakers.”
The survey showed that expectations for both output price inflation and wage growth were well below the figures announced over the past 12 months of 7.4 percent and 6.9 percent, respectively.
A separate survey of recruitment firms, published on Friday by KPMG and the Recruitment and Employment Confederation, pointed to a slowing labor market. A measure of inflation in starting salaries in the survey was at its lowest levels since March 2021. Meanwhile, hiring activity slowed sharply and recruiters said layoffs were prompting more candidates to look for work.
These results echo comments made by Andrew Bailey, Governor of the Bank of England, earlier this week in which he suggested that a rate hike may not be necessary.
“The question now is, with headline inflation falling, . . . will we see inflation expectations continue to fall? . . . and will that be reflected in the wage negotiation?” he told MPs, noting that interest rates were now “much closer” to their peak than Before.
Markets still expect the central bank to raise interest rates by a quarter point this month from 5.25 percent.
The Bank of England survey found that more than half of companies are still reporting staffing problems, a factor that has driven strong pay growth recently, although this is down from 70 per cent for CFOs at the start of the year.
The KPMG/REC survey also found that competition for workers remains fierce in many sectors — including hospitality, accounting and logistics — despite a sharp decline in job openings for other professional and clerical roles.
Further evidence of the cold labor market came from data published by the Office for National Statistics on Thursday. It showed that 10 percent of companies reported that hourly wages increased month-on-month in July, down from one in four in April.