Gilt yields exceed mini-budget level on strong UK wage growth

Strong UK wages data on Tuesday pushed short-term gilt yields above levels of turmoil following Liz Truss’ “mini” budget last autumn, as investors bet interest rates would climb further.

Wage growth has accelerated in the three months to April, where the Bank of England believes it is consistent with bringing inflation back to its 2 percent target.

The two-year gilt yield rose 0.23 percentage points to 4.86 per cent, compared with 4.64 per cent in late September after unfunded tax cuts were announced in the “mini” budget. Yields on long maturing gilts have not exceeded last autumn’s levels.

The pound strengthened 0.4 per cent to $1.256 in early trade.

The Office for National Statistics said average private sector wages, excluding bonuses, were up 7.6 percent in the three months from a year earlier, the fastest pace of growth on record outside the coronavirus period. Average public sector wages were 5.6 percent higher.

Across all employees, annual increases in total pay, including bonuses, accelerated 6.5 percent, much faster than the 6.1 percent figure analysts were expecting.

Strong wages data compounded higher inflation data for April of 8.7 per cent, which suggested UK inflation was returning to normal levels at a much slower pace than the BoE predicted.

“If there was still any doubt about the direction of monetary policy, these data should signal another interest rate hike from the Bank of England next week and further tightening in the months ahead,” said Yael Selphin, chief economist at KPMG. “

Markets expect the BoE interest rate to rise from the current 4.5 percent to 5.5 percent by the end of this year, raising borrowing costs for the government and mortgage holders, for whom lenders have withdrawn fixed-rate deals .

Megan Green, who will join the BoE’s monetary policy committee in July, told lawmakers on Tuesday she thought higher inflation was now pushing up wages. “The effects of the second round are visible,” he told the Treasury Committee of the House of Commons.

While she did not say how she would vote at its first MPC meeting in August, Green said the BOE was right to raise rates in May after Silvana Teneiro, whom she is replacing on the committee, voted against.

“I think there is some underlying persistence (to inflation) and therefore getting from 10 per cent to 5 per cent… is probably easier than getting from 5 per cent to 2 per cent,” he said.

UK economist Samuel Toombs, head of the consultancy Pantheon Macroeconomics, said wage growth was “too much momentum” for the monetary policy committee to stop raising rates. While analysts had expected a one-time jump in wages due to an increase in the statutory minimum wage in April, he said, the data showed wage growth was mainly being driven by high-paying sectors such as finance and manufacturing. and hence it can be expected to continue. at the same speed.

Although recruitment has slowed sharply over the past year – with ONS data showing a further decline in the number of vacancies – the data contains some other signs of weakness. The previous decline in the number of salaried employees was revised downwards. The ONS said the unemployment rate averaged 3.8 per cent in the three months to April, up from 3.7 per cent in the previous quarter but down from the previous month.

Meanwhile, the number of people in employment reached a record high, although the employment rate, at 76 percent, remains below its pre-pandemic level. The share of UK adults choosing not to work or look for a job remains higher than before the pandemic, with no further drop in the rate of economic inactivity last month, although it fell 0.4 percentage points from the previous quarter to 21 The percentage is done.

This article has been amended to correct the two-year maximum gilt yield in light of the “mini” budget