UK wage growth dips but interest rate increase seen on track

The Bank of England is expected to raise interest rates again next month even though official figures Tuesday showed wage growth moderating and despite the latest parliamentary tribulations surrounding Brexit.

The Office for National Statistics said Tuesday that average weekly earnings were 2.7 percent higher in the three months to May compared with the year before. Though down on 2.8 percent in the previous three months, wages are still growing faster than consumer prices, which were up 2.4 percent in the year to May. Including bonuses, average wage growth dropped to 2.5 percent in May, from 2.6 percent in April.

Despite the fallback, household incomes continue to grow following a long squeeze when inflation outstripped earnings. Inflation rose sharply after the pound plunged in the wake of Britain's vote to leave the European Union in June 2016, stoking the price of imported goods.

Though inflation has come down from highs around 3 percent, it's still above the Bank of England's target of 2 percent. That provides rate-setters a reason to raise interest rates, especially as rising household incomes can stoke inflation. As can the strength of the labor market. Tuesday's figures showed the unemployment rate remained at 4.2 percent, its lowest level since the mid-1970s.

As a result, the Bank of England is widely expected to raise its benchmark interest rate on Aug. 2 by a quarter-point to 0.75 percent.

The problem for the nine members of the Monetary Policy Committee is that the economy barely grew in the first quarter of the year — only 0.2 percent from the previous three months — and uncertainty surrounding Brexit appears to be getting more acute. Prime Minister Theresa May's latest proposals for a future EU relationship appear to be foundering following the resignation of a series of ministers and a deeply divided parliament.

"May's labor market report is hardly a humdinger but it likely will be just strong enough to convince the Committee that it should raise Bank Rate next month," said Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, referring to the main interest rate.

Expectations, however, can change quickly. The central bank was widely expected to raise rates in May but opted against it following weak economic data. Much could hinge on Wednesday's inflation figures and whether there's another fall. Also the first estimate of U.K. second-quarter economic growth is due for release before the central bank meets to consider raising interest rates.

"Markets are still expecting the Bank of England to raise interest rates in August," said Ben Brettell, senior economist at stockbrokers Hargreaves Lansdown. "But given the increasingly uncertain climate I think there's a real chance policymakers will sit on their hands and wait for firmer signals the economy is on the right track before risking raising borrowing costs."