Yahoo Finance Pound hits 15-month high as UK wages rise
The pound (GBPUSD=X) hit a 15-month high against the dollar on Tuesday as UK wage growth reached a record 7.3%.
Sterling was trading at $1.2914, up 0.4% on the day, the highest level since April 2022, while it also climbed 0.4% against the euro (GBPEUR=X) to €1.1731.
Data from the Office for National Statistics (ONS) showed that average pay rose by 7.3% year-on-year in the quarter to May, the joint-highest reading on record.
The reading came in stronger than expected, with economists forecasting a small slowdown in pay growth to 7.1%.
It comes as workers have sought pay rises in order to help keep up with the increased cost of living. However, despite the record increase, pay rises still lag behind inflation which currently stands at 8.7%.
“With sterling at a 15-month high the value of the overseas earnings which dominate the index is relatively less. The reason for the pound’s move higher is today’s UK jobs data,” Russ Mould at AJ Bell said.
“While there are some signs the tightness in the labour market is starting to ease, wage growth remains uncomfortably high in the context of the Bank of England’s (BoE) efforts to get surging prices under control.
“If inflation is like toothpaste, to borrow the well-worn analogy, then the Bank is likely to have to make a big mess of the economy trying to get it back in the tube. Borrowers face more pain with the prospect of further rate hikes to come.”
Read more: FTSE higher as UK wage growth piles pressure on Bank of England
Private sector regular pay also rose 7.7% on the same basis, a record high outside the pandemic period, and running well ahead of the BoE’s forecast for growth of 6.3% in Q2.
Meanwhile, the UK unemployment rate rose to 4% in the three months to May, up from 3.8% in the previous three months, the ONS added.
Chancellor Jeremy Hunt said: "Our jobs market is strong with unemployment low by historical standards. But we still have around one million job vacancies, pushing up inflation even further.
"Our labour market reforms - including expanding free childcare next year — will help to build the high wage, high growth, low inflation economy we all want to see."
The news causes further concern for the BoE, which is looking to cool the economy and has already warned about a price-earnings spiral.
Financial markets are predicting that Threadneedle Street is set to hike UK interest rates at its next meeting in August.
Read more: Bailey hints at more Bank of England interest rate rises
The City is betting there is a 70% chance that rates will rise by another half-point increase from 5% to 5.5%, the highest level since late 2007, while there is a 30% possibility of a smaller, quarter-point increase to 5.25%.
The bank rate is expected to hit as much as 6% by November, and at least 6.25% by next spring.
“The pressure on the MPC to continue increasing rates in August will be intense,” Martin Beck, chief economic advisor to the EY ITEM Club, said.
Watch: How does inflation affect interest rates
Download the Yahoo Finance app, available for Apple and Android.
