The UK is preparing for higher interest rates as inflation risks rise

On Tuesday, Britain received another sign that inflation may continue to agonize. The country braced itself, once again, for higher interest rates as bond yields rose above levels when Liz Truss was prime minister last year.

The data showed that wage growth, a closely watched indicator of how deep inflation is in the economy, was The rise in Britain is at the fastest pace in at least two decades.

normal payExcluding bonuses, Britain’s Office for National Statistics said on Tuesday that in February, March and April it rose 7.2 percent from a year earlier. That’s the most since current records began, excluding the pandemic period, when furlough distorted labor market data.

The agency also reported other signs of labor market strength, including rising employment, more people looking for jobs, and a lower unemployment rate. While usually desirable indicators of people’s living standards, these now point to increasing inflationary pressures.

Traders responded to the data by betting that the Bank of England will raise interest rates higher.

Labor market data was “almost unequivocally hawkish”, according to economists at HSBC, meaning the numbers favor tightening monetary policy. HSBC economists said they expect the central bank to raise interest rates by a quarter point at its meeting next week, with many policymakers voting for an even bigger increase.

For a year and a half, interest rates in Britain have been pushed higher as the country grapples with its worst inflation in more than four decades. The Bank of England raised interest rates to 4.5 per cent from nearly zero at the end of 2021. While inflation peaked late last year in Britain, falling to 8.7 per cent in April, it has slowed less than in the United States and in most parts of the world. Europe .

Traders are betting that the Federal Reserve may pause interest rate increases this week, but the Bank of England may not be able to follow suit – despite laying the groundwork for a possible pause months ago – because data still suggests inflation is more steady than it has been. expected. .

Now, traders are betting that British policymakers may have to raise interest rates over the summer and keep them higher through the fall, to 5.7 percent early next year.

British government bond yields are higher than when Mrs. Truss was prime minister in September and October. The tax-cutting and free-market agenda has spooked markets and sent bond yields soaring, turbulent the mortgage market and the pension industry. The two-year bond yields, which were strongly affected by changes in the central bank rate, rose about 0.2 points to 4.8 percent on Tuesday morning, the highest level since 2008.

During Lady Truss’ premiership, these high returns reflected concerns about Britain’s fiscal responsibility. Now they point to fears that inflation will be stubborn and the central bank will have to raise interest rates and keep them there for longer than previously expected.

Again, expectations cause higher rates Turmoil in the mortgage market Some lenders withdraw offers for new mortgage deals.

Jonathan Haskell, member of the Bank of England’s rate-setting committee, He wrote in a newspaper column on Monday that “further interest rate increases cannot be ruled out”.

He added, “As difficult as our current conditions are, the underlying inflation will be worse.”

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

On Tuesday, Ibrahim Qadri, a Goldman Sachs analyst, wrote in a note that he remained concerned that wage growth in Britain would stabilize at a level out of line with the central bank achieving its 2 percent inflation target.

While the fast pace of wage growth is likely to irk central bank policymakers, it will provide limited comfort to many British workers as it continues to lag behind inflation. Most people are experiencing real wage cuts as prices for food and services are rising at the fastest rate in decades.

“Rising prices continue to eat away at people’s paychecks,” Chancellor of the Exchequer Jeremy Hunt said in a statement on Tuesday. So we must stick to our plan to halve inflation this year to boost living standards. “