UK Pay Settlements Hold at 3.5% for Second Consecutive Month
1h ago|4 min readStandard
Fazen Markets Editorial Desk
Collective editorial team · methodology
uk wagesbank of england
Fazen Markets Editorial Desk
Collective editorial team · methodology
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A key measure of UK wage pressure remained unchanged for a second month, signalling persistent inflationary pressure. Survey data from Industrial Relations Services (IDR) published on 7 June 2026 showed median pay settlement levels holding steady at 3.5%. This figure has not declined since April, complicating the path for the Bank of England as it assesses the timing of future interest rate cuts. The stability in settlements, which measure agreed pay increases, comes amid broader labour market tightness and consumer price inflation readings that remain above the central bank's 2% target.
The persistence of 3.5% wage growth occurs against a backdrop where the Bank of England has held its Bank Rate at 5.25% for ten consecutive meetings. The latest inflation reading for April 2026 showed the Consumer Price Index at 2.3% year-on-year, having fallen sharply from highs above 11% in late 2022 but still exceeding the official target. A critical catalyst for this wage stickiness is the ongoing adjustment of the National Living Wage. The government-mandated increase, which took effect on 1 April 2026, raised the hourly rate for workers aged 21 and over by 9.8% to £12.10. This statutory floor exerts upward pressure on pay structures across lower-wage sectors, compressing differentials and forcing employers to raise wages higher up the pay scale to retain staff.
The IDR survey recorded a median pay settlement of 3.5% in the three months to May 2026, identical to the figure for the three months to April. Historical data indicates this level remains elevated compared to pre-pandemic norms. The median settlement stood at 2.0% in the first quarter of 2020, just before the pandemic disruption. The current 3.5% reading is also significantly above the Bank of England's 2% inflation target, creating a real wage growth environment that could sustain domestic demand and price pressures. The following comparison illustrates the recent trend:
| Period | Median Pay Settlement |
|---|---|
| 3m to Feb 2026 | 4.0% |
| 3m to Mar 2026 | 3.8% |
| 3m to Apr 2026 | 3.5% |
| 3m to May 2026 | 3.5% |
Sectoral data reveals dispersion, with settlements in the private sector averaging 3.6%, while the public sector lagged at 3.2%. This compares to annual growth in average weekly earnings, a broader Office for National Statistics measure, which was running at 4.2% in March 2026.
The steady wage data directly impacts interest rate expectations, pushing out the timeline for monetary easing. This is bearish for rate-sensitive UK government bonds (gilts); the 2-year Gilt yield, which is highly sensitive to interest rate expectations, may face upward pressure and could test the 4.25% level. Sectors with high labour cost exposure, such as consumer discretionary retail (e.g., TSCO, MRW) and hospitality, face margin compression risks as they struggle to pass on higher wage costs to price-conscious consumers. Conversely, firms providing payroll, HR software, and workforce management solutions could see sustained demand as businesses seek efficiency. A counter-argument is that recent labour market data shows a slight uptick in unemployment and a cooling in vacancies, which may eventually feed through to softer wage demands with a lag. Market positioning reflects this uncertainty, with flows into short-dated gilt ETFs remaining subdued as investors await clearer directional signals from the Bank of England's Monetary Policy Committee.
The immediate catalyst is the Bank of England's next monetary policy decision and accompanying Monetary Policy Report on 19 June 2026. The vote split and any revisions to the inflation forecast will be scrutinised for hawkish or dovish bias. Subsequent labour market data releases, specifically the ONS's Average Weekly Earnings report for April, due on 17 June, will provide a critical cross-check against the IDR survey figures. A key level to watch is the 3.0% threshold for pay settlements; a break below this level would likely be interpreted by markets as a green light for a near-term rate cut. Until then, the 2-year Gilt yield trading above 4.0% will signal persistent market scepticism about imminent easing.
The persistence of wage growth at 3.5% reinforces the Bank of England's argument that domestic inflationary pressures remain, making an immediate interest rate cut less likely. Mortgage rates, particularly for new fixed-term products, are closely tied to market expectations for the future path of the Bank Rate. Lenders have recently priced out earlier cuts, leading to a slight repricing higher for 2-year and 5-year fixed mortgage rates. Until wage and services inflation data show sustained decline, mortgage rates are likely to remain elevated relative to late 2023 levels.
UK wage growth remains notably higher than in both the Eurozone and the United States, explaining the divergence in central bank policy. As of April 2026, negotiated wage growth in the Eurozone was approximately 3.0%, while the US Employment Cost Index showed year-on-year growth of 3.8% for Q1 2026. The UK's figure of 3.5% for settlements is more persistent, however, and is coupled with higher services inflation, justifying the Bank of England's more cautious stance compared to the European Central Bank, which began its cutting cycle in June.
Historically, pay settlements have been a lagging indicator of inflation, often peaking after consumer price inflation has begun to fall. During the high inflation period of the 1970s and early 1980s, a wage-price spiral was evident, where high inflation led to high wage demands, which in turn fed back into prices. The current cycle is testing whether such a dynamic re-emerges. The Bank of England's models suggest sustained pay growth above 3.5% is inconsistent with returning inflation to the 2% target on a durable basis, making this metric a critical input for policy decisions.
Sticky wage growth at 3.5% entrenches the high-for-longer interest rate narrative, delaying anticipated Bank of England easing.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.
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