Private sector wage growth has fallen to its lowest level in nearly six years, Office for National Statistics data shows, with the Bank of England’s rate-setting committee due to meet on Thursday to weigh the evidence on whether to raise interest rates again.
The ONS found that private sector wages rose by 2.9 per cent in the three months to July, down from 6.3 per cent for the public sector over the same period and below the 6.1 per cent recorded for private sector workers in the quarter to June. The last time private sector wage growth sat this low was October 2020, when the rate was 2.4 per cent.
Overall, average earnings excluding bonuses increased by 3.5 per cent, matching economists’ expectations. Including bonuses, earnings rose by 3.9 per cent.
Private Sector Wage Growth and the Bank of England
Bank of England officials watch private sector wage growth closely because it signals the risk of second-round inflation effects: when pay rises sharply, firms tend to pass higher labour costs on to consumers, keeping price pressures alive. The Monetary Policy Committee (MPC) will factor in both Wednesday’s inflation data and Tuesday’s unemployment figures as it prepares its decision.
Liz McKeown, director of economic statistics at the ONS, said: ‘There remains a notable difference between public and private sector pay growth, with public sector figures continuing to be affected by the timing of NHS pay awards this year. The labour market remains broadly stable, with employment and unemployment largely unchanged in the latest period.’
Martin Beck, chief economist at WPI Strategy, said weaker private sector wage growth had become ‘increasingly difficult to ignore’. ‘It’s now around the pace the Bank thinks is consistent with the two per cent inflation target, while its own surveys suggest little prospect of this changing anytime soon,’ Beck said.
Not everyone sees the path clear for a pause, however. Liam McLaughlin, associate economist at the National Institute of Economic and Social Research, warned that a rebound in oil prices could ‘complicate the picture, particularly if higher energy and food costs feed into wage bargaining later this year, keeping the Bank of England alert to the risk that wage growth proves more persistent than anticipated’.
That caution finds some echo in the Bank’s own data. According to the Bank of England Decision Maker Panel for September, expected year-ahead wage growth remained unchanged at 4.1 per cent on a three-month moving-average basis, suggesting firms are not yet pricing in a sharp deceleration in pay. That reading sits well above the pace that Beck and others regard as consistent with the two per cent inflation target.
The MPC’s deliberations are set against a backdrop of deep internal division. A recent rate decision saw the committee split 5-4 in favour of holding rates at 4 per cent, according to Stock Invest. Governor Andrew Bailey, noting persistent wage pressures and an economy that still shows some resilience, argued for a cautious wait-and-see approach before considering cuts, Stock Invest reported. City analysts, for their part, have said the Bank is unlikely to tighten monetary policy at Thursday’s meeting, though some have flagged that the committee could take a more cautious line on wage and price effects. Last Friday, two-year gilt yields edged up above 4.75 per cent following stronger-than-expected growth figures, reflecting market expectations of as many as four further rate rises.
Jobs Market Cools as Unemployment Holds at 4.9 Per Cent
The ONS also revealed that the unemployment rate remained at 4.9 per cent in the three months to July. The number of payrolled employees continued to fall, with an estimate suggesting there were 101,000 fewer people in work in July this year than at the same point in 2025. Public sector employment, by contrast, has increased by around 33,000 since June 2025. The number of vacancies decreased by 8,000 and remain at lows not seen in around five years.
Since Labour took office in mid-2024, the unemployment rate has crept up from 4.4 per cent to 4.9 per cent, with employers citing higher taxes and regulation as factors raising the cost of taking on new workers.
The softening jobs market has put pressure on the government. Helen Whately, the shadow work and pensions Secretary, said: ‘Under Labour we’ve seen unemployment go up month after month. Now it’s stuck, leaving hundreds of thousands of people out of work and living off welfare. Their taxes and red tape have destroyed jobs and opportunities.’
With the MPC’s decision due on Thursday and inflation data landing on Wednesday morning, the committee will have little room to defer the hard choices the diverging wage figures present.
