UK stocks slip as wage growth slows, BoE rate hold looms

UK stocks slipped on Thursday as easing inflation and slowing wage growth reinforced expectations that the Bank of England will hold interest rates steady, while sterling’s strength weighed on exporters. The FTSE 100 fell 0.4% by mid-morning, with consumer staples and retail names leading declines after Tesco reported a sharp slowdown in UK sales growth despite a rise in market share.

Tesco’s UK like-for-like sales growth slowed to 1.2% in the first quarter, down from 3.4% a year earlier, as shoppers tightened spending amid persistent cost-of-living pressures and geopolitical uncertainty in the Middle East . The supermarket giant, which has gained market share in recent months, cautioned that trading conditions remain “challenging” and maintained its full-year profit guidance. Analysts at Barclays noted that the slowdown “points to a more cautious consumer” and could pressure margins if promotional activity intensifies.

The broader market reaction reflected a cautious mood after official data showed UK wage growth decelerating to 5.8% in the three months to April, the slowest pace in five years . The slowdown, combined with a further easing in headline inflation to 2.8% in May, has strengthened the case for the Bank of England to keep its benchmark rate at 5.25% when policymakers meet next week. “The data supports a ‘wait-and-see’ approach,” said ING economist James Smith. “The MPC will want to avoid premature easing, but the disinflation trend is clear.”

Sterling’s 0.3% rise to $1.2750 added to the pressure on domestically focused stocks, as exporters saw their overseas earnings eroded by the stronger currency . The FTSE 250, which is more exposed to the UK economy than its blue-chip counterpart, underperformed, falling 0.6%. Among individual movers, British American Tobacco dropped 2.1% after reports that the US Food and Drug Administration is reviewing its menthol cigarette ban, while Rolls-Royce gained 1.3% on strong demand for its Trent engines.

Across the Atlantic, US stock futures pointed to a higher open as investors bet on potential Federal Reserve rate cuts later this year, with the S&P 500 up 0.3% in pre-market trading . Asian shares followed suit, with Japan’s Nikkei 225 rising 0.8% and South Korea’s Kospi gaining 0.5% as regional investors took their cue from Wall Street’s overnight gains. The MSCI Asia ex-Japan index was up 0.6%, extending a two-day rebound.

With the BoE’s decision looming, economists warn that any unexpected hawkish signals could jolt markets. “The path to rate cuts remains narrow,” said HSBC’s UK economist Elizabeth Martins. “The Monetary Policy Committee will be watching services inflation and wage settlements closely.” For now, investors are pricing in a 60% chance of a hold next week, according to swap markets, with the first cut not fully priced until November.