(Bloomberg) — UK salaries increased at the slowest pace in three-and-a half years in September in a fresh sign that the labor market is loosening ahead of Chancellor Rachel Reeves’s first budget, according to a survey watched by the Bank of England.

The Recruitment & Employment Confederation and KPMG said an increased number of candidates and reduced demand for staff limited pay growth for permanent hires to the weakest since February 2021. Wages for temporary staff fell outright. 

The BOE is closely watching wage inflation for signs of returning price pressures as policymakers debate whether to cut interest rates again at their next meeting in November. Governor Andrew Bailey has raised the possibility of being “a bit more aggressive” on rate cuts if the news on inflation continues to be positive.

“Pay continues to moderate and is now below its long-term trend,” said Neil Carberry, REC chief executive. “This should add to the willingness of the Bank to become more activist on interest-rate cuts, as the Governor hinted last week.”

The findings add to evidence that firms are putting decisions on hold due to worries about tax rises and spending cuts in the Oct. 30 budget after Reeves claimed the Labour government inherited a £22 billion ($28.8 billion) fiscal black hole from the Conservatives. Vacancies contracted last month at the sharpest pace since March, the REC survey showed. 

Adding to anxieties is a planned overhaul of employment rights, due to be introduced in Parliament this month, that would give more power to workers. For businesses, economic and political uncertainty has a bigger impact than elevated borrowing costs, BOE Chief Economist Huw Pill told a conference on Friday.

“The slowing of hiring activity seen in September is to be expected as businesses apply the brakes on recruitment ahead of the budget and wait for clarity on future taxation, business, and economic policy,” said Jon Holt, chief executive and senior partner of KPMG in the UK.

Staff availability is increasing due to firms freezing hiring and letting more people go. REC noted, however, that shortages remain in some pockets of the economy, especially for high-skill postings.

“This is a picture of a jobs market waiting for a signal,” Carberry said. “Recruiters report that projects in client businesses are ready to go, but confidence is not yet high enough to push the button.”

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