BoE poised to raise rates amid record pay rise

The Bank of England is once again facing intensified pressure to increase interest rates next month following a higher-than-expected surge in wages during June, attributed to a one-off payment to NHS workers.

Despite the UK labour market presenting figures of employers cutting jobs in response to a deceleration in economic activity, a rise in borrowing costs seems imminent.

The Office for National Statistics (ONS) reported that total pay, including bonuses, rose by 8.2% annually in the three months ending June, surpassing analysts’ anticipated 7.3% growth.

Excluding bonus payments, regular pay grew by 7.8% during the quarter, marking the highest annual growth rate since comparable records were initiated in 2001. This uptick from the 7.5% seen in March to May underscores the acceleration in wage growth.

To address concerns regarding the potential triggering of a wage-price spiral, PM Rishi Sunak highlighted that his foremost priority was to curtail inflation. He asserted that a reduction in the cost of living crisis was on the horizon, which in turn would lead to a decrease in interest rates, alleviating pressure on mortgages.

Despite these developments, the unemployment rate rose by 0.3 percentage points to 4.2% during the quarter. This reflects the increasing number of redundancies.

The Bank of England had recently increased borrowing costs to 5.25%, marking the 14th consecutive interest rate hike. Market signals indicate an 84% likelihood of a quarter-point interest rate rise to 5.5% in September, accompanied by a 16% probability of a larger half-point increase to 5.75%.

The rapid wage growth, especially within the IT, finance, and business services sectors, has bolstered the case for another rate increase from the central bank.

The ongoing wage growth has been particularly notable in high-earning professions like the City. Nevertheless, the TUC General Secretary, Paul Nowak, emphasised that a vast majority of workers continue to face a real-terms pay squeeze, with household budgets remaining under strain.

In response to the growing demand for increased pay for NHS workers, the government granted health staff a 5% raise along with an additional one-off bonus, potentially reaching up to 8.2%.

Both the recent labor market report and the forthcoming inflation data are set to impact the Bank’s decision on interest rates in its upcoming September meeting.

Overall, the report reflects the complex economic landscape in the UK, where accelerating wage growth coexists with increasing job losses and inflationary concerns.