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Pressure on living standards

Slowing wage growth may not prevent interest rate rise

Money - own picA rise in interest rates next month is still being factored in by market analysts despite wage growth slowing in the last three months.

Analysts have been torn over the direction of rates following a mix of news showing ‘tepid’ growth.

Workers saw wages increase 2.7% against 2.8% in the three months to May, while unemployment fell by 12,000 to 1.41 million, according to new figures from the ONS.

The UK unemployment rate remained at its joint lowest since 1975 at 4.2%. Unemployment in Scotland increased slightly in the three months to May, reaching 4.3%.

There is a growing view that the majority of the Bank of England’s policymakers will vote to raise rates after their next meeting on 2 August.

The employment rate in Scotland at 75.5% remains near its record high of 75.8%, having increased by 1.4% points over the last year.

Anna Leach, CBI Head of Economic Intelligence, said: “The labour market continues to confound expectations of a slowdown, with the employment rate at another record high and the unemployment rate the lowest since the 1970s.

“But despite high vacancies, pay growth has slipped to a six-month low, keeping up the pressure on people’s living standards. This leaves the MPC’s decision on a knife-edge when it meets to set interest rates in a couple of weeks’ time.”

Suren Thiru, Head of Economics at the British Chambers of Commerce (BCC), said:  “While we expect that interest rates will rise sooner rather than later, with earnings growth underwhelming there remains sufficient scope for the MPC to keep a rates hike on hold for longer, particularly given the current economic and political uncertainty.”

However, City analysts were more persuaded that a rate rise is on the way sooner rather than later. Investec economist Victoria Clarke, said: “We see recent labour dynamics, including today’s report, as consistent with the Bank of England pressing ahead with an August rate hike.”

Dr Stuart McIntyre of the Fraser of Allander Institute said: “The latest data reinforce the recent trends of high employment and low unemployment in the Scottish economy.

“While recent increases in unemployment, up by 0.5%-points over the past year, provides a note of caution, it is important to remember that unemployment remains, by historical standards, at a low rate. 

“Similarly, an employment rate of 75.5% represents a near record level of employment in Scotland.

“The data suggest that there has been something of a shift away from self-employment over the past year, with all the employment growth coming from people working as employees.”

Andrew McRae, policy chairman at small firms’ organisation FSB Scotland, said: “Smaller Scottish firms are now more confident about trading conditions than they have been for some time. Policymakers need to build on this optimism by tackling issues like the scourge of late payment and ensuring smaller firms get a fair share of public contracts.”




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