Surprise UK wage jump raises bets on hiking interest rates

Wage growth in the United Kingdom accelerated and employment increased in the three months to April, heightening predictions that the Bank of England will hike interest rates again, maybe multiple times, to combat persistent inflationary pressures.

On Tuesday, data from the Office for National Statistics (ONS) showed that the employment market was hotter than all analysts surveyed by Reuters expected, driving sterling higher and causing another dip in British government bond prices.

The findings add to evidence that the economy is not cooling as quickly as the central bank had planned, despite the fact that Britain has one of the highest inflation rates among major advanced nations.

The ONS reported that annual pay growth excluding bonuses increased to 7.2% in the three months to April, up from 6.8% in the three months to March.

It was the highest reading on record outside of the COVID-19 epidemic, when salary records were affected by vacation plans. Reuters surveyed economists, who predicted a 6.9% increase on average.

Wage growth, including bonuses, increased to 6.5% from 6.1% earlier, but it still behind consumer price inflation, which was 8.7% in April, implying that Britons are earning less in real terms.

Employment increased by 250,000 in the three months to April, above the 162,000 increase predicted by a Reuters survey.

Financial markets on Tuesday estimated the chances of a 0.5 percentage point hike in interest rates at 33%, up from 17% on Monday, and rates reaching 5.75% by the end of the year at 65%.

The unemployment rate, which was predicted to grow to 4%, declined to 3.8% in the three months to April from 3.9% in the previous three months, according to the ONS.

The Bank of England will closely examine April’s statistics, which is the first to reflect the impact of a 9.7% increase in the minimum wage, as it attempts to assess the degree of the impact of Britain’s current stretch of double-digit inflation.

Central bank policymakers are likely to remark that headline employment and pay figures were higher than expected, but the unemployment rate was lower than expected.

On Monday, Bank of England rate-setter Catherine Mann stated that central banks will struggle to convey the end of their rate-tightening cycles and should not worry about it at the expense of taking efforts to reduce inflation.

Later Tuesday, Bank of England Governor Andrew Bailey and incoming Monetary Policy Committee member Meghan Greene are scheduled to meet with MPs.