Bank of England Policymaker Warns Strong Pay Growth Could Restrict Rate Cuts
Megan Greene, a prominent member of the Bank of England's monetary policy committee (MPC), has issued a significant warning that robust UK pay growth could substantially limit the central bank's capacity to implement interest rate reductions this year. In a detailed speech delivered at the Resolution Foundation thinktank in London, Greene expressed concerns that the apparent stabilisation of wage growth might hinder ongoing efforts to combat persistent inflation.
Wage Growth Concerns and Inflationary Pressures
Greene highlighted that the recent decline in wage growth "may have run its course", pointing specifically to Bank of England surveys indicating that employers are planning to award pay rises of 3.5% or more throughout this year. This development comes despite official figures showing a slight weakening in wage growth, excluding bonuses, to 4.5% between September and November, down from 4.6% in the preceding three-month period.
The MPC maintains a strict inflation target of 2%, but recent data revealed inflation reached 3.4% in December, marking an increase from 3.2% in November. Greene emphasised that consistent wage growth typically exerts upward pressure on inflation unless matched by corresponding productivity improvements. However, she expressed "certain scepticism" regarding any significant productivity rebound occurring this year.
International Factors and Monetary Policy Considerations
Greene further explained that the MPC's decisions regarding future borrowing cost reductions would be significantly influenced by potential interest rate cuts from the US Federal Reserve. She warned that "if the Fed were to cut rates more aggressively than the Bank this year, this should cause US demand for UK exports to rebound, providing upward pressure on UK inflation".
This warning coincides with the Bank of England's own forecast evaluation report, which acknowledged that the institution had "consistently underestimated the full effects of inflation" following the 2022 energy price shock triggered by Russia's invasion of Ukraine. The report confirmed that "after 2022, the Bank's medium-term inflation and wage growth forecasts proved repeatedly too low".
Business Survey Reveals Mounting Cost Pressures
A separate, closely monitored survey of UK business activity has revealed concerning trends. The purchasing managers' index from S&P Global indicated that companies reported a sharp increase in costs during January, with the overall inflation pace remaining unchanged from December's seven-month high. Businesses across manufacturing and services sectors overwhelmingly attributed rising costs to "elevated wage pressures", alongside increasing transport expenses and raw material prices from suppliers.
These mounting cost pressures have compelled firms to implement their most significant price increases in over a year. The survey also documented a "steep loss" of employment among respondents, particularly within the hospitality sector, with many companies blaming job cuts on the government's introduction of higher national insurance contributions and increases to the national living wage.
Market Expectations and Economic Outlook
The survey findings have prompted City economists to revise their expectations regarding potential interest rate reductions. Many have reduced their forecasts from two anticipated rate cuts this year, with the first now not expected until June. The current base rate stands at 3.75%, following four reductions implemented by the MPC during 2025.
Despite these challenges, the survey recorded a reading of 53.9 in January, representing an improvement from 51.4 in December and marking a 21-month high. Any score exceeding 50 indicates economic growth, suggesting some underlying resilience within the UK economy despite the inflationary pressures and wage growth concerns highlighted by Greene and other economic observers.
