Potential Interest Rate Cut by Bank of England Faces Delay Due to Minimum Wage Hike

March 29, 2024
Close-up of British bank notes

The possibility of the Bank of England initiating interest rate cuts in June is gaining traction, yet one factor that might prompt the Bank to postpone its decision is the impending increase in the minimum wage.

Commencing in April, the minimum wage is slated to rise from £10.42 per hour to £11.40, marking a notable 9.4 per cent increment. This rise follows a similar hike of 9.7 per cent in April of the previous year. There are concerns that this surge could sustain elevated levels of wage growth, precisely as the Bank contemplates easing borrowing costs.

The prospect of heightened wage growth could, in turn, spur further price hikes, particularly if businesses find it more challenging to absorb the additional expenses compared to last year. Rain Newton-Smith, the director general of the Confederation of British Industry (CBI), has cautioned that “more members than ever are telling us they’re worried about the increase next month.”

“We’ve heard from a lot of businesses that they’re challenged by this because it’s two years in a row,” noted Neil Carberry, chief executive of the Recruitment and Employment Confederation (REC). “We’re being told there’s no margin left to squeeze here,” he added.

According to the National Institute for Economic and Social Research (NIESR), corporate profit margins hit their highest level in nearly a decade during the first quarter of 2023. However, the latter half of last year witnessed a “significant erosion” of these margins as workers pushed for higher wages.