(Bloomberg) -- UK pay growth cooled to a two-year low in the three months through July, another step down in wage pressures that keeps the Bank of England on track to cut interest rates again this year.

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Average earnings excluding bonuses rose 5.1% from a year earlier, the Office for National Statistics said Tuesday. It was smallest increase since the summer of 2022 and in line with the median forecast in a Bloomberg survey of economists.

The pay data also confirmed a ￡460 ($602.46) boost to the state pension next year, another large increase that Prime Minister Keir Starmer hopes can soothe a backlash among Labour MPs over plans to cut winter fuel subsidies for pensioners.

While the BOE is unlikely to cut rates at next week’s meeting, the figures keep policymakers on course for a reduction later this year.

After reducing borrowing costs for the first time in over four years last month, Governor Andrew Bailey and his colleagues have suggested they favor a cautious approach to further cuts.

Wage growth is still higher than the BOE deems compatible to keeping inflation to the 2% target. The latest data also showed unemployment fell to 4.1% in the latest three months, a second consecutive drop, while the number of people in work grew a faster-than-forecast 265,000.

“Wage growth is moving lower, and therefore in the right direction for another interest rate cut, likely in November,” said Tomasz Wieladek, chief European economist at T. Rowe Price. “With strong growth in activity and strong growth in employment, there is risk that wage growth eventually plateaus at a level that is not consistent with the inflation target.”

Traders slightly reduced bets on rate reductions following the figures but are still expecting a quicker pace of cuts later in 2024. Markets are leaning towards successive moves in November and December after shifting their bets in recent weeks on concerns over the resilience of economic activity, particularly in the US. The figures had little impact on the pound, which traded 0.1% up against the dollar at $1.3090.

What Bloomberg Economics Says...

“The drop in annual private sector regular pay growth will give the Bank of England a little more confidence that inflation is on a durable path to 2%. Still, it’s unlikely to be enough to prompt a change of thinking at the central bank. Wage gains remain too high for comfort which, alongside strong underlying services inflation and an economy that is growing swiftly, is likely to mean the BOE is cautious about how quickly it cuts rates in coming months. We expect the next move down in November and a quarterly pace of easing thereafter.”

—Ana Andrade and Dan Hanson. Click to read the REACT

The latest figures mean the state pension will rise by 4% — the level of earnings growth including bonuses — under a guarantee to raise the payment every year by the highest of wage growth, inflation or 2.5%. Consumer prices are growing at just over 2%. It will mean a ￡460 addition to the full pension in April.

Starmer is hoping the inflation-busting increase will calm concerns among his own MPs over cuts to winter fuel subsidies for the elderly. The prime minister is facing a potential rebellion from Labour MPs when the decision to ax the allowance for all but the poorest retirees is put a vote in the House of Commons later Tuesday.

The labor market data also showed:

• Private-sector pay growth, the gauge watched by the BOE, eased to 4.9%, also the lowest in two years

• Households finances continued to be bolstered by pay rises outstripping inflation. Real wages grew an annual 3% in the three months to July, down slightly

• Vacancies slipped to 857,000 in the three months to August, declining across most sectors. Wholesale and retail, repair of motor vehicles and motorcycles, and human health and social work activities posted the largest declines

• Economic inactivity decreased across all age groups over the quarter, mainly due to fewer students, long-term sick or retired. Still, those declines were partly offset by higher numbers of people dropping out of the labor force because they were discouraged from seeking work

Yael Selfin, chief economist at KPMG UK, said that the figures showed the “labour market continues to lose steam.”

“That, however, is unlikely to cajole the MPC into further easing monetary policy in its upcoming meeting,” she added.

--With assistance from Aline Oyamada, Mark Evans and Joel Rinneby.

(Adds details from report, charts, comment)

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