Bank of England survey finds pay awards carry no inflation premium

The result cuts against the wage-pressure case that officials have used to argue the Bank can no longer hold Bank Rate at 3.75%.

A Bank of England survey has found no evidence that employers are building an inflation premium into pay awards, which removes one of the main planks of the case for raising interest rates.

That case has leaned heavily on wages. Deputy governor Lombardelli has said pay growth is still too high for the inflation target to hold, and Ramsden has pointed to wage agreements as a reason the risks to inflation lean upwards. Bailey said stable wage growth near 3% would be reassuring.

The survey gives the doves something concrete, and it matters because the committee is already split. Six of nine members voted to hold Bank Rate in September, while three wanted an immediate rise. BofA expects increases in November and February.

But wages are only half the argument, and the other half has not gone away. Headline inflation rose to 3.5% in September from 3.1%, though core inflation of 2.8% matched forecasts. The Bank's September minutes cite a 36% rise in Brent crude and a 78% rise in UK wholesale gas prices since July. Bailey has said pass-through of energy costs is subdued for now, yet persistent energy prices make holding rates harder to defend. Public inflation expectations, at 4.3% in the Citi/YouGov survey, moved the wrong way.

So the survey weakens the wage leg of the hawkish case without touching the energy leg. It matters most for the bond market. Gilt yields reached multi-decade highs this month, with the 10-year at 5.527% and the 30-year at 6.047% on October 8, according to LSEG data. A lower path would ease the strain on long-dated gilts and reduce the risk of that stress spilling into long-dated Treasurys.