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Sterling edges up as tight labour market supports further rate hikes

Illustration shows British Pound banknotes

By Samuel Indyk

LONDON (Reuters) - The British pound edged higher on Tuesday after data showed a tight labour market and accelerating pay growth, adding to the Bank of England's inflation worries as it tries to bring prices down from multi-decade highs.

Pay excluding bonuses increased by an annual 6.4% in the September-to-November period, the Office for National Statistics (ONS) said, the biggest rise since records began in 2001, excluding the COVID-19 period that was distorted by lockdowns and government support measures.

The ONS said Britain's unemployment rate held at 3.7%, close to its lowest level in almost 50 years.

"With unemployment at generational lows, the labour market remaining tight and the economy resilient, the Bank of England may be forced to raise rates a little more than people think," said Ben Laidler, global markets strategist at eToro.

"That's one of the reasons why the pound has been well supported here," Laidler added, also highlighting plunging gas prices and China's reopening as reasons for the recent strength in the pound.

The BoE is expected to raise rates for the tenth consecutive meeting when it meets on Feb. 2 as it attempts to further bring down inflation from the more-than-four-decade high of 11.1% reached in October last year.

Money markets are fully pricing in a 25 basis points (bps)rate hike at that meeting, with a roughly 75% chance of a larger 50 bps increase, according to Refinitiv data.

By 1025 GMT, the pound was up 0.1% against the dollar to $1.2211.

Against the euro, the pound was up 0.2% at 88.54 pence, although still close to the 88.97 pence level hit on Friday, which was its lowest since September last year.

The ONS's inflation data on Wednesday is expected to be the next major trigger for the pound ahead of the BoE's meeting next month.

"Depending on the resilience of tomorrow's release of December UK CPI data, it seems too early to dismiss the risk of another 50 basis points rate hike," Chris Turner, ING's global head of markets, said in a research note.

The consumer price index is expected to have eased to 10.5% on an annual basis last month from 10.7% in November, according to a survey of economists polled by Reuters.

(Reporting by Samuel Indyk; Editing by Savio D'Souza)