Search Box

British Pay Growth Spurs Interest Rate Hike Speculation Amid Labor Concerns

British Pay Growth Spurs Interest Rate Hike Speculation Amid Labor Concerns

British Pay Growth Spurs Interest Rate Hike Speculation Amid Labor Concerns
British Pay Growth Spurs Interest Rate Hike Speculation Amid Labor Concerns(Image-Getty)

 In the latest update on British pay growth, it has been revealed that the Bank of England is increasingly likely to raise interest rates, potentially for the final time in the current economic cycle. This development comes alongside signs of a cooling labor market, as reported on Tuesday.

According to data from the Office for National Statistics (ONS), average weekly earnings growth in the three months leading up to July surged to 8.5% in annual terms. This represents a slight increase from the 8.4% reported a month earlier, marking a historical high when accounting for pre-pandemic distortions in records spanning over two decades.

The majority of investors anticipate that these robust earnings figures will prompt the Bank of England to implement another interest rate hike on September 22, pushing rates up to 5.5% from the current 5.25%. This move aims to counteract the UK's elevated inflation rate, which remains the highest among major advanced economies.

Nevertheless, various labor market indicators are giving rise to caution among key figures within the Bank of England. Notably, the unemployment rate has risen, the number of people employed has decreased significantly, and job vacancies have fallen below the one-million mark for the first time in two years.

Hugh Gimber, global market strategist at J.P. Morgan Asset Management, raised the question of the path forward, stating that the Bank of England might hesitate to continue tightening if other central banks globally opt for a pause. However, he also noted that if incoming data fails to decisively improve, the possibility of another rate hike to reach a terminal rate of 5.75% remains on the table.

In a recent statement, BoE Governor Andrew Bailey acknowledged that the central bank is nearing the conclusion of its series of rate increases. However, he suggested that borrowing costs might still need to rise further due to persistent inflation pressures.

The unemployment rate climbed to 4.3% in the three months leading up to July, up from 4.2% the previous month, reaching its highest level since the three months ending in September 2021, according to the ONS.

Furthermore, employment experienced a larger-than-expected drop of 207,000 in the same three-month period, including a substantial decline of 182,000 in London—marking the most significant drop since the three months ending in October 2020.

Among the most concerning trends, the number of employed individuals aged 16 to 24 also saw a notable decline of 176,000 in the three months leading up to July, representing the second-largest drop of its kind on record.

Economists at Nomura expressed their apprehensions, asserting that the labor market is displaying more vulnerabilities than ever before. They anticipate that the Bank of England's Monetary Policy Committee may be more divided in the coming weeks regarding the decision to raise interest rates than in previous months.

Following the release of this data, the value of the British pound experienced a slight decline against the U.S. dollar.

In terms of wage growth, salaries continued to rise at a rapid pace, surpassing the inflation rate. Paychecks excluding bonuses increased by 7.8% compared to the previous year—matching economists' expectations from a Reuters poll and representing the joint-fastest rate since ONS records began in 2001.

After adjusting for consumer price inflation, total average weekly earnings exhibited a positive growth of 0.6%, marking the first such increase since March 2022. However, it's essential to note that despite these positive developments for workers, real wages have not improved beyond the level seen over 15 years ago.

Finance minister Jeremy Hunt commented on the wage growth, emphasizing the importance of sticking to the plan to combat inflation in order for real wages to sustainably increase.

Next Post Previous Post
No Comment
Add Comment
comment url