Yahoo Finance Interest rates set to rise as pay growth jumps
Fears the Bank will have to increase UK interest rates by more than previously thought to get the inflation rate down
UK wage growth has strengthened, heaping pressure on the Bank of England to keep raising interest rates to avoid an inflationary spiral.
Regular pay (excluding bonuses) rose by 7.2% per year in the February-April quarter, the latest figures from the Office for National Statistics show, up from 6.6% in November-January.
That is the fastest growth rate for basic pay on record, if you exclude the COVID-19 pandemic which distorted wage data. Wages were boosted by the 9.7% rise in the minimum wage in April.
Total pay, including bonuses, grew by 6.5% per year in the three months to April.
Although pay is still not rising fast enough to match the rate of increase in households’ living costs, economists said wage growth was well above levels consistent with the Bank of England’s 2% inflation target, underlining the case for the central bank to continue raising interest rates.
Read more: Wage growth jumps to record high but still behind inflation
Yael Selfin, chief economist at KPMG UK, said the UK’s “Continued strength in pay growth” will warrant higher interest rates”.
She said: "The pickup in regular pay growth is the latest sign that inflation is driving up pay demands, which in turn is making inflation stickier. With negative productivity growth, these figures are well above the levels consistent with the 2% target.
“If there was still any doubt about the direction of monetary policy, these data should solidify another interest rate increase from the Bank of England next week, and probably more in the coming months.”
The Bank of England has warned sharp increases in wages are likely to prolong the UK's still high rates of inflation.
ING says another increase in UK interest rates next week now looks very likely.
“Faster-than-expected wage growth points to a rate hike in June and potentially August, and is a reminder that pay pressures are likely to ease only gradually.
That doesn’t necessarily suggest the Bank of England needs to raise rates as aggressively as markets expect, but it does imply that rate cuts are some way off,” it said.
Traders are betting that the Bank of England will raise interest rates to 5.75% by the end of the year.
The Bank is due to set interest rates next week, on Thursday 22 June, and looks certain to hike borrowing costs for the 13th time in a row.
Read more: Interest rates: Bank of England policy-maker hints at further rises
Currently, a quarter-point increase in Bank rate to 4.75%, from 4.5%, is seen as a 70% chance.
And a half-point increase, taking Bank rate to 5%, is now seen as a 30% possibility.
PwC economist Jake Finney, said: “A rate hike in June now seems all but locked in but we expect that we are closer to the peak base rate than markets are expecting.”
Emma Mogford, fund manager at Premier Miton Monthly Income Fund, said today’s jobs market report suggests interest rates will have to remain high for longer.
“The labour market remains surprisingly tight with unemployment falling and wage inflation increasing,” she said.
“While broadly good news for the UK economy, this is very challenging for the Bank of England. It may mean interest rates have to stay higher for longer to bring inflation back to normal levels,” she added.
The Bank of England’s newest interest rate setter warned that the central bank may have a tough job in returning inflation to its 2% target.
"I think that there is some underlying persistence and so getting from 10% to 5% ... is probably easier than getting from 5% to 2%," Greene told MPsfrom parliament's Treasury Committee during her appointment hearing.
Greene also warned about the risks of relaxing monetary policy too soon. She said:“If you engage in stop-start monetary policy, you may end up having to tighten even more and generating an even worse recession on the other side.
“And also that inflation expectations can’t be allowed to become de-anchored or you end up in that situation.”
US economist Greene joins the Monetary Policy Committee as an external member after a working as global chief economist at consultancy group Kroll. She replaces Silvana Tenreyro as an external member of the MPC in July.
Watch: How does inflation affect interest rates?
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