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Pay rise surprise leads to forecasts of higher interest rates

  • By Daniel Thomas
  • Business reporter, BBC News

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UK wages have grown at their fastest rate in 20 years, excluding the pandemic, raising expectations that UK interest rates will have to rise.

Regular pay excluding bonuses rose 7.2% in the three months to April, although it still lags behind inflation – the rate at which prices rise.

The Bank of England has warned large wage increases are contributing to the UK’s still high inflation rate.

It has raised interest rates 12 times since 2021 to try to slow the pace of price increases.

Higher interest rates may be good for savers, but they increase the cost of repayment for millions of mortgage holders.

Lenders have raised interest rates and pulled out hundreds of transactions, causing uncertainty for borrowers.

On Tuesday, government borrowing costs – which directly affect mortgage rates – rose to their highest levels since last year’s small budget.

Samuel Tombs, chief UK economist at Pantheon Economics, said the fresh pick-up in wage growth would “pour more oil” on expectations of higher interest rates.

This is because the figures “give the impression that the UK has a particular problem with ingrained high inflation”.

Darren Morgan, director of economic statistics at the Office for National Statistics (ONS), said that in terms of cash, base pay is currently growing the fastest since current records began, excluding the period. the figures are “distorted by the pandemic”.

“Even so, however, wage growth continues to lag behind inflation.”

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Andrew Hunter, co-founder of job search engine Adzuna, said the minimum wage increase had had a “significant” impact on the April wage figures.

The minimum wage – known as the National Living Wage – rose to £10.42 an hour in April for those aged 23 and over.

Mr Hunter told the BBC’s Today programme: “Nearly two million workers in the UK have received a pay rise of almost 10 per cent this spring.

Workers in many industries have been on strike since last summer because wages have not kept pace with inflation. But the gap is narrowing as inflation begins to fall.

The Bank of England has warned strong wage increases are likely to prolong the UK’s still high inflation rate. The cost of living rose 8.7% in the year to April, more than four times the Bank’s 2% target.

“Your average worker will be happy when their average wage goes up, but that’s not necessarily a good thing for inflation,” Mr Hunter said.

The bottom line of these numbers is that it is difficult to see evidence of a cooling labor market, and as such, the Bank of England is still on track to push interest rates above 5% in the coming weeks. The markets even think there is now a 35% chance of a 0.5 percentage point increase next week.

Normal wages are still growing, with private sector wage growth now sitting at 7.6% in the three months to April. It was much stronger than expected. The impact of raising the national living wage is an important factor here. However, this is still well below the inflation rate, which means that cash increases but the reality is squeezed. It won’t look like a wage boom.

In recent days, financial markets have pushed interest costs on the UK government’s two-year loan back to levels last seen in small budgets and well above US levels. It’s a bet that inflation in the UK is proving more stubborn and tough than expected and elsewhere. Tuesday’s figures provide further evidence for that.

Figures from the ONS also show:

  • UK unemployment rate fell slightly to 3.8% from 3.9% in the three months to April
  • The number of people who do not go to work due to long-term illness reaches a new record of nearly 2.6 million VND
  • The number of employed people hit an all-time high of 33.1 million.

The UK economy is currently struggling to thrive as soaring costs of living and rising interest rates squeeze households. But the job market remains resilient.

Prime Minister Jeremy Hunt said: “High prices are continuing to eat into people’s wages – so we must stick to our plan to halve inflation this year to raise living standards.”

However, Labour’s shadow premier, Rachel Reeves, said: “Family finances are being squeezed to the breaking point as real wages continue to fall and a record number of people lose their jobs due to long illness. term.”

Tips for asking for a raise

1. Choose the right time – Planning a talk in advance will allow you and your boss time to prepare, and means you’ll be more likely to have a productive conversation.

2. Bring proof – If you are asking for a raise, you should have plenty of evidence of why you deserve it.

3. Be confident – When asking your boss for more money, it helps if you are confident and know your worth.

You can read the full range of tips from career experts here.


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