Bank of England Faces Dilemma as Wage Growth Defies Labor Market Weakness

Bank of England Faces Policy Dilemma as Wages Keep Rising

The Bank of England is facing a growing challenge as UK wage growth remains strong despite signs of a weakening labor market.

According to official data released Tuesday, the unemployment rate in the UK edged up in the early months of the year, while the number of job vacancies continued to fall. Despite this softer labor activity, average wage growth held firm at 5.6% year-on-year, raising concerns about underlying inflationary pressures.

“The combination of easing labor activity but still-firm pay growth leaves the Bank in a bind,” said economist Gregory. Strong wage growth can fuel inflation, complicating the Bank’s efforts to bring it back to its 2% target.

Analysts believe the Bank of England is likely to proceed cautiously, continuing with gradual interest rate cuts — possibly one every three months — as it tries to balance cooling inflation with an economy that shows mixed signals.

The central bank had previously signaled that sustained progress on inflation would be necessary before making significant changes to monetary policy. However, with labor market indicators softening and pay growth remaining elevated, the Bank faces a delicate balancing act in the months ahead.