Britain braces for high rates as inflation signals strengthen

Britain received another sign on Tuesday that inflation could linger painfully. The country again braced for higher interest rates as bond yields rose above levels when Liz Truss was prime minister last year.

Data showed that wage growth, a closely monitored indicator of how deeply embedded inflation is in an economy, was rising in Britain at the fastest rate in at least two decades.

Regular pay, excluding bonuses, rose 7.2 percent in February to April from the same period a year earlier, the UK’s Office for National Statistics said on Tuesday. That’s the highest since current records began, except during the pandemic, when leave skewed labor market data.

The agency also reported other signs that the job market was strong, including rising employment, more people looking for work and a fall in the unemployment rate. While these indicators are normally desirable for people’s living standards, they now point to mounting inflationary pressures.

Traders reacted to the data by betting that the Bank of England would raise interest rates even further.

According to HSBC economists, labor market data was “almost undeniably aggressive,” meaning the numbers argued for tighter monetary policy. HSBC economists said they expected the central bank to raise rates by a quarter point next week, with several policymakers voting for a larger hike.

For a year and a half, interest rates in Britain have been pushed up as the country grapples with its worst inflation in more than four decades. The Bank of England has raised interest rates from almost zero at the end of 2021 to 4.5 percent. While inflation peaked late last year in Britain and fell to 8.7 percent in April, it has slowed less than in the United States and much of Europe. .

Traders are betting that the Federal Reserve could pause its rate hikes this week, but that the Bank of England may not be able to follow suit – despite laying the groundwork months ago for a possible pause – as data continue to point out that inflation is more stubborn than expected .

Now, traders are betting that UK policymakers will have to keep raising rates throughout the summer and keep them high into the fall to hit 5.7 percent early next year.

UK government bond yields are higher than when Ms Truss was Prime Minister in September and October. Its agenda for tax cuts and free markets spooked markets and caused bond yields to rise, causing turmoil in the mortgage market and the pension sector. Yields on two-year bond yields, which are heavily influenced by changes in central bank interest rates, rose about 0.2 percentage point on Tuesday morning to 4.8 percent, the highest since 2008.

During Mrs Truss’s premiership, this reflected high concern for Britain’s fiscal responsibility. Now they point to concerns that inflation will be stubborn and that the central bank will have to raise interest rates and hold them at that level for longer than previously expected.

Expectations of higher rates are once again the cause unrest in the housing market while some lenders are rolling in offers for new mortgage deals.

Jonathan Haskel, a member of the Bank of England’s Interest Rate Setting Committee, wrote in a newspaper column on Monday that “further rate hikes cannot be ruled out”.

“As difficult as our current circumstances are, embedded inflation would be worse,” he added.

At the end of last month, Goldman Sachs economists said they expected the Bank of England to raise interest rates to 5.25 percent, the highest level since February 2008.

On Tuesday, Ibrahim Quadri, a Goldman analyst, wrote in a note that he remained concerned that wage growth in Britain would stabilize at levels inconsistent with the central bank meeting its target of 2 percent inflation.

While the rapid pace of wage growth is likely to alarm central bank policymakers, it will provide little comfort to many UK workers as it lags inflation. Most people are experiencing a real wage cut as the price of food and services rises at its fastest pace in decades.

“Rising prices continue to erode people’s pay checks,” Jeremy Hunt, the Chancellor of the Treasury, said in a statement Tuesday. “So we need to stick with our plan to cut inflation in half this year to raise living standards.”