Employers Expect 3.5% Pay Hikes: The Wage Spiral Worry

While borrowers celebrate the Bank of England’s rate cut to 3.75%, a quieter statistic in the official report is causing sleepless nights for economists. The Bank’s regional agents have reported that employers are still expecting pay growth of 3.5% in 2026. This projection was a key reason why four members of the Monetary Policy Committee voted against lowering interest rates this week.
The concern is simple: if wages keep rising significantly above the inflation target, companies will continue to raise prices to cover their costs, creating a “wage-price spiral.” This fear of entrenched inflation led Chief Economist Clare Lombardelli to warn that “elevated wage growth” might require the Bank to slow down its plans for future rate cuts. The 5-4 vote split reflects a deep disagreement on whether this risk is manageable.
On the other side of the argument, the five members who voted for the cut believe the broader economic slowdown will naturally cap wage demands. With GDP shrinking and the labor market cooling, they argue that employees will have less bargaining power in the coming year. They view the current wage expectations as a lagging indicator rather than a future threat.
For the average worker, this is a double-edged sword. A 3.5% pay rise offers some protection against the cost of living, but if it forces the Bank to keep interest rates higher for longer, those gains could be wiped out by expensive mortgages and loans. The Bank is effectively betting that wage growth will cool down on its own without needing high interest rates to force the issue.
As 2026 approaches, the interplay between paychecks and interest rates will define the UK economy. If pay settlements come in lower than expected, rate cuts could accelerate. But if the 3.5% prediction holds true, the “gradual path downward” for rates that Governor Bailey promised might hit a sudden roadblock.