13 June 2023

Homeowners warned to expect more mortgage pain after wage growth shoots up

13 June 2023

UK wages have surged at their fastest rate on record outside of the pandemic, reinforcing expectations that interest rates will have to rise further as policymakers look to curb stubborn inflation.

Official figures showed that average regular wages, not including bonuses, jumped 7.2% higher in the three months to April, up from 6.8% in the three months to March and higher than expected.

April’s 9.7% rise in the National Living Wage helped push up salaries to the highest level since records began in 2001, excluding the skewed pandemic years.

Despite the record surge, the Office for National Statistics (ONS) revealed pay continues to be outstripped by rising prices, with regular wages down 2.3% with Consumer Prices Index inflation (CPI) taken into account.

But experts said the figures would raise the chances of another rate hike next week, with the Bank of England having already warned that high pay growth is one of the factors stopping inflation from easing back at a quicker pace.

This will put further pressure on homeowners as mortgage rates leap higher.

The strong UK jobs data also saw yields on two-year dated UK Government bonds – which are used to set prices for financial products such as mortgages – rise above the level seen in the aftermath of last autumn’s ill-fated mini-Budget, hitting 4.76% at one stage.

Lenders have already been pulling mortgage deals in their droves and hiking rates as financial markets now believe interest rates may need to rise from 4.5% currently to 5.5% or even higher, sparking turmoil in mortgage markets.

Samuel Tombs at Pantheon Macroeconomics said: “The renewed pick-up in wage growth in April will add fuel to the recent rise in gilt yields and expectations for the future path of Bank Rate, by fanning the impression that the UK has a unique problem with ingrained high inflation.”

He added: “wage growth has far too much momentum for the Monetary Policy Committee (MPC) to stop hiking Bank Rate yet.”

Sandra Horsfield at Investec Economics said it was now much more likely that the Bank will have to raise rates next Thursday, as well as in August.

She said despite 12 rate rises in a row so far, “it is not clear the medicine administered so far is having enough of an effect” to rein in inflation.

The ONS figures also revealed strength in the wider jobs market, with Britain’s unemployment rate falling unexpectedly to 3.8% in the three months to April from 3.9% in the previous three months.

Most economists were expecting the unemployment rate to edge up to 4%.

It came as the number of people in work hit a new record high and rose past its pre-pandemic level for the first time.

The ONS said the employment rate lifted to 76% in the latest quarter, edging up from 75.9% in the previous three months, with the number of people in jobs at an all-time high of 33.1 million, up 250,000 quarter-on-quarter as more Britons returned to the jobs market.

More timely data estimated the number of employees on UK payrolls rose by 23,000, or 0.1%, during May to 30 million, while the ONS revised away last month’s surprise fall, with data now showing an increase of 7,000 in April.

Darren Morgan, director of economic statistics at the ONS, said: “The biggest driver in recent jobs growth… is health and social care, followed by hospitality.”

Rising prices are continuing to eat into people’s pay cheques

But there were also some worrying signs for the employment sector, with vacancies falling for the 11th time in a row, down 79,000 quarter-on-quarter in March to May to 1.05 million, with the ONS saying this reflected “uncertainty across industries”.

More people previously classed as inactive looked to join the jobs market in another sign of cost-of-living pressures, with increases in both employed and self-employed.

But the number of people off due to long-term sickness reached another high of 2.6 million in the three months to April.

The ONS also said there were 257,000 days lost to strikes in April as widespread industrial action continued to take its toll.

Chancellor Jeremy Hunt said: “Rising prices are continuing to eat into people’s pay cheques – so we must stick to our plan to halve inflation this year to boost living standards.”

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