Accelerated wage growth in UK forecasts rise in interest rates
UK wages have experienced a significant surge, the most substantial in the last two decades, not considering the pandemic period. This surge is triggering predictions of a hike in the UK's interest rates. Excluding bonuses, regular pay witnessed a 7.2% increase in the three-month period up to April, albeit falling short of the inflation rate.
The Bank of England issued a warning, stating that substantial wage hikes are contributing to persistently high inflation rates in the UK. Since 2021, the bank has increased interest rates 12 times in an attempt to manage price surges.
While higher interest rates might prove beneficial for savers, they are causing an increase in repayment costs for numerous mortgage holders. The Bank of England's potential decision to raise interest rates beyond the anticipated level, potentially from the current 4.5% to even 5.5%, is causing instability in the mortgage market.
Consequences for borrowers and the government
As a result of this unpredictability, lenders are pulling out hundreds of deals and increasing rates, causing borrowers to face uncertainty. Concurrently, the government's borrowing costs, which directly affect mortgage rates, reached their highest level since last year's mini-budget.
Samuel Tombs, Chief UK Economist at Pantheon Economics, remarked that the revival in wage growth would add to expectations of higher interest rates. He pointed out that these statistics reinforce the notion that the UK faces a distinct issue with entrenched high inflation.
The rise in the minimum wage, known as the National Living Wage, had a significant influence on the April pay figures, as per Andrew Hunter, co-founder of the job search engine Adzuna. The wage rose to £10.42 per hour in April for those aged 23 and over, leading to nearly two million UK workers witnessing an almost 10% pay increase this spring.
Strikes, inflation and labour market
Several industries have experienced strikes since last summer as wages fail to keep up with inflation. However, this gap is starting to close as inflation rates begin to decrease. The Bank of England has issued a warning stating that significant wage increases are likely to prolong high inflation rates. The cost of living increased by 8.7% in the year to April, more than quadruple the Bank's 2% target.
Andrew Bailey, the Bank of England governor, voiced that the labor market is currently strained. There has been a decrease in labor supply, and its recovery is slowly progressing. Now, firms are facing significant challenges in recruiting labor, leading to reluctance in letting go of existing labor.
The interest rate for the UK government to borrow money over two years is now noticeably higher than the levels reached following Liz Truss's mini-budget. It is the highest it's been in the last decade and a half and surpasses the rates seen for the US government.
Inflation concerns and market expectations
The market now expects that the UK's distinct problem with persistent and sticky inflation will necessitate prolonged periods of high interest rates. Some market speculations see a half percentage point rate increase in the following week, with rates projected to be closer to 6% than 5% by the end of the year.
The current scenario differs from the aftermath of the mini-budget, mainly seen in short-term rates. Last autumn's real problem was with longer-term 10- and