A Bank of England survey of chief financial officers found expected pay growth remained at 5.2% on average in the three months through February, even as the cost-of-living crisis fades.

(March 7): UK businesses are expecting to face stubbornly high wage growth of over 5% over the next 12 months, a level seen as unsustainable by the Bank of England (BOE).

A BOE survey of chief financial officers found expected pay growth remained at 5.2% on average in the three months through February, even as the cost-of-living crisis fades.

The Decision Maker Panel gauge has not cooled since last summer and has remained above 5% for 20 months.

The findings will be a concern for the BOE, which needs pay rises to moderate to achieve its 2% target sustainably. It sees wage growth at around 3% to 3.5% as consistent with stable prices.

BOE rate-setters have repeatedly pointed to pressures in the labour market for their cautious approach to loosening policy, with markets not expecting the first rate cut to arrive until the second half of 2024.

Investors have scaled back their expectations of how far the BOE will cut interest rates. Markets are pricing in two quarter-point reductions this year, with a 50% chance of a third. As recently as January, they were all-but betting on five.

While a persistently tight labour market is expect to boost wages, firms’ one-year ahead CPI inflation expectations edged down 0.1 percentage point to 3.3% in February. The three-month average fell to 3.6%, down 0.3 percentage points compared to the three months to January. Businesses expect their own output prices to rise 4.3% over the coming year.

While inflation is on course to slip below 2% in the coming months, it is forecast to pick up again given the stubbornness in services inflation and wage growth.

Chief economist Huw Pill warned last week that he is still “some way off” voting to cut rates and cautioned against a “false sense of security” as headline inflation falls.