LONDON, July 11 (Reuters) – A key gauge of British wages rose at the fastest pace on record, but official data also showed signs that the inflationary heat in the labor market is cooling, offering the prospect of relief for the Bank of England.
Sterling rose but the yield on two-year British government bonds, which are sensitive to speculation about interest rates, fell sharply, suggesting investors were reducing their bets on how much higher the BoE will go with the series of rate hikes.
“There have been some tentative signs that the labor market may be turning around… But this needs to be balanced against still-sustainable strong wage growth,” said Ellie Henderson, economist at Investec bank.
“The Bank will probably want to see a slowdown in wage growth before it can consider calling an end to the fight against inflation.”
The 7.3% rise in core earnings in the three months to May compared with the same period a year ago was the highest along with growth in April – which was revised upwards on Tuesday from an initial 7.2% – and the second quarter of 2021 ., according to data from 2001.
Economists polled by Reuters had forecast a 7.1 percent rise and said the stronger-than-expected increase left the BoE on track to raise interest rates for the 14th time in a row on Aug. 3, possibly by another half a percentage point.
Before that, the statistics office will announce inflation data for June.
Sterling hit a 15-month high against the dollar and also gained modestly against the euro. Markets saw a roughly 50% chance of BoE benchmark interest rates peaking at 6.5% in early 2024, up from 5% now.
INFLATIONARY PRESSURE
The BoE is keeping a close eye on wage growth as it assesses what inflationary pressures remain in the British economy. Consumer price inflation held at 8.7% in May, higher than any other major rich economy.
Gov. Andrew Bailey said Monday that wages and prices charged by companies were rising too fast, and he vowed to “finish the job.” Finance Minister Jeremy Hunt said the government would have to act responsibly on public sector pay.
But inflationary pressures were tempered by a few signs of a slowdown in the labor market.
The unemployment rate unexpectedly rose to 4.0% from 3.8% in the three months to April, and the number of people out of work rose by the most since late 2020. Job vacancies extended the streak of declines to the most its lowest level since mid-2021.
Samuel Tombs of Pantheon Macroeconomics said the BoE’s Monetary Policy Committee (MPC) could see enough signs of slowing data to halt rate hikes soon, but probably not in August.
“For now, wages are still rising too fast for the MPC to tolerate continuously,” he said. “But it has always taken some time for changes in the labor market to feed through to wage growth, and some leading indicators remain encouraging.”
Annual wage growth, including bonuses, accelerated to 6.9%, the fastest on record, except for the period of the coronavirus pandemic when government job subsidies skewed the figures, the ONS said.
Other signs of easing inflationary pressures in the data included a drop in the unemployment rate – which measures people out of work and not looking for work – to its lowest level since the start of the pandemic in 2020.