A key bond yield moved near a 15-year high on Tuesday after jobs data suggested the Bank of England may need to raise interest rates further to damp inflation.
The Office for National Statistics said that annual growth in employees’ average total pay, which includes bonuses, was 6.9% in the three months to May, up from a revised 6.7% in the three months to April. Economists had forecast an increase of 6.8%.
Bank of England Governor Andrew Bailey said in a speech on Monday that the resilience of Britain’s economy had increased wage and demand pressures, contributing to “sticky” high inflation.
Though down from the double-digit reading seen a few month ago, consumer price inflation in the U.K is 8.7%, still more than four times the BoE’s 2% target.
“The latest U.K. wage data is a blow for the Bank of England in its battle against high inflation,” said James Smith, developed market economist at ING. Smith did note progress, however, as the number of people inactive continued to fall.
The central bank is expected by the market to raise interest rates from the current 5% to a cycle peak of 6.5% to damp demand and force inflation lower.
The prospect of more rate hikes pushed sterling
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above $1.29 for the first time since April 2022 and forced the policy-sensitive 2-year gilt yield
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up a basis point to 5.361%, its highest since the great financial crisis 15 years ago.
The rise in bond yields is impacting the housing market, with the average rate on a two-year fixed mortgage in Britain hitting 6.66 per cent on Tuesday, the highest since 2008, according to Moneyfacts.
“Markets expect interest rates to go higher, mortgage payers are marching towards fixed rate renewal dates with a sense of dread, and employers are nervous,” said Danni Hewson, AJ Bell head of financial analysis.
