“Exceptionally strong” wage growth data means another rise in interest rates next week is more likely, economists have told i.
Wage growth has outstripped inflation for the first time in more than 18 months as earnings continued to surge at a record pace, new figures show, and experts have said this may force the Bank of England’s hand, and lead to a record 15th consecutive increase in the base rate next week.
Charles Goodhart, a former member of the Bank’s monetary policy committee (MPC), which sets interest rates, said the data “increased the likelihood of another 0.25 percentage point increase” while another ex-MPC member, Martin Weale, told i that an increase was “the most likely outcome” and that the wage increase data had made this more probable.
Ken Wattret, of S&P Global Market Intelligence, said that continued “exceptionally strong” wage growth “tipped the balance of opinion on the MPC towards further tightening”.
The Bank of England’s base rate currently sits at 5.25 per cent, and experts have previously told i that this may be the the highest – or close to the highest – that they will go.
But economists fear high wages can feed in to high inflation – by increasing the surplus cash people have to spend on goods and services – and that a rise in interest rates may be needed to quash this.
Average regular earnings growth, excluding bonuses, remained at a record high of 7.8 per cent in the three months to July compared to the same period last year, the Office for National Statistics (ONS) said.
It is the first time since October 2021 that wages have overtaken inflation, which soared to a 40-year high of 11.1 per cent last October as the cost of living crisis saw household energy and food bills skyrocket.
Annual growth in pay including bonuses leapt by 8.5 per cent in May to July, with earnings boosted by one-off payments to NHS and Civil Service staff.
“With inflation proving much more sticky than in peer economies, the hiking cycle has further to go despite the rapidly deteriorating growth outlook” said Mr Wattret.
At the same time as wages rising, the unemployment rate rose to 4.3 per cent in today’s data, and the MPC will have to balance their attempts to cut inflation with risking an economic downturn by pushing the cost of borrowing too high.
“The MPC are still very data dependent and the forthcoming inflation data will also have an effect depending on whether it is higher or lower than expected” added Mr Goodhart.
Others have also suggested a rate rise next week is the most probable outcome.
Ashley Webb at Capital Economics said: “The further rise in wage growth will only add to the Bank of England’s unease and supports our view that the Bank will raise interest rates once more, from 5.25 per cent currently to a peak of 5.5 per cent, next week.”
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