UK Pay Settlements Hold at 3.6% as Markets Await Rate Hike Next Week
Key Facts
The Bank of England said average pay settlements in the UK stood at 3.6% so far in 2026, signalling stable growth in pay agreed with workers. In its October Agents’ summary, the bank said early indicators suggest 2027 settlements will generally be close to this year’s levels, with expectations edging up since the previous round. This comes as investors await the Monetary Policy Committee meeting scheduled for 5 November, with expectations broadly pointing to a rate hike. Economists link those expectations to concerns that the conflict between the United States and Iran could prolong inflationary pressures. The bank is due to publish the committee’s summary and minutes, as well as the Monetary Policy Report, at the meeting, while the current interest rate is 3.75%, according to the bank’s table.
But the picture for next year’s pay remains preliminary, as the bank said most business contacts have yet to provide estimates for their 2027 settlements. The number of companies that provided estimates rose from the previous round, doubling, but remains insufficient to provide a complete picture of pay plans. Among those that submitted estimates, union pressure and difficulties recruiting and retaining specialists are pushing settlements higher. Offsetting these pressures are a looser labour market, weak demand, narrowing company margins and affordability concerns. These competing factors explain why settlement expectations remain close to this year’s levels despite the slight rise in expectations.
Hiring conditions remain less tight than in normal circumstances, despite a slight improvement in hiring intentions compared with the previous round. The bank’s agents said recruitment difficulties remained slightly below their usual level, consistent with companies’ view of a more flexible labour market. In wage expectation data, the wage growth companies expect over the next twelve months was 3.4% in the three months to September, unchanged from the reading for the three months to August. The Bank of England said companies therefore expect their wage growth to fall by 0.6 percentage points over the following twelve months. This indicator differs from the actual pay settlements tracked by the bank’s agents, though both feed into assessments of future wage pressures.
Actual settlements in 2026 fell from the 4% average recorded in 2025, according to data from the bank’s agents cited by Clare Lombardelli in a speech. Employers attributed the decline to a smaller increase in the national minimum wage, lower inflation when settlements were set, and a looser labour market. This backdrop comes as consumer price inflation rose in September, with the annual rate climbing to 3.5% from 3.1% in August. The Consumer Prices Index including owner occupiers’ housing costs also rose, to 3.6% from 3.3%. The Monetary Policy Committee said in its September minutes that companies believed higher-than-expected inflation could push settlements above where they would otherwise have been, but weak activity and a soft labour market were likely to limit second-round effects.
On prices, the bank’s agents said consumer price inflation continues to rise gradually, as higher energy-related input costs offset the effects of weak demand and competition in retail. The sharpest cost pressures were concentrated in energy, energy-intensive materials and technology inputs. For food, the agents expected inflation to end 2026 in the 3% to 4% range. Food producers estimated inflation would be between 3% and 6% in the first half of 2027, while supermarkets expected increases not to exceed 4%. The Office for National Statistics said transport, particularly motor fuels, made the largest upward contribution to the change in annual inflation between August and September, while restaurants and hotels made the largest offsetting contribution. These figures reflect continued pressure from energy and food costs on the price trajectory as demand and labour-market indicators diverge.
The bank’s assessment is based on an economy that recorded quarterly growth of 0.4% in the second quarter of 2026, exceeding the July report’s forecast by 0.1 percentage points. By contrast, the bank’s agents described demand as weak and said companies faced squeezed margins and limited capacity to absorb higher costs. Economists, according to Reuters, believe the bank is heading for its first rate hike in three years at next Thursday’s meeting, as concern grows that a continuation of the US-Iran conflict could keep inflation elevated. The decision is due on 5 November, alongside the Monetary Policy Committee summary, meeting minutes and Monetary Policy Report. The current interest rate is 3.75%, according to the Bank of England’s table, while markets are focused on the committee’s assessment of inflation risks against weak demand and a soft labour market.