Inflation is “taking a lot longer” than hoped to come down, Bank of England governor Andrew Bailey said on Tuesday, as investors bet on further interest rate rises on the back of strong wage data.
Following the release of figures showing annual private-sector wage growth climbing to 7.6 per cent in the three months to April, short-term gilt yields rose above the highs reached during the turmoil around Liz Truss’s “mini” Budget last autumn.
“As I’m afraid this morning’s numbers illustrate, we’ve got a very tight labour market,” Bailey said. “We still think the rate of inflation is going to come down, but it’s taking a lot longer than we expected.”
Lord Nick Macpherson, Treasury permanent secretary in 2005-2016, raised the grim prospect for Rishi Sunak on Tuesday that the prime minister could be fighting an election in 2024 in the face of a recession.
“It’s still possible the government may get lucky: underlying inflation may come down quicker than expected,” he wrote on Twitter. “But I wouldn’t bet on that. Much more likely that the Bank of England will raise rates to a level where a recession next year becomes inevitable.”
Alongside still low unemployment, the rise in wages was far above the level the BoE thinks is consistent with bringing inflation back to its 2 per cent target.
Two-year gilt yields on Tuesday rose 0.26 percentage points to 4.89 per cent, compared with their peak of 4.64 per cent in the aftermath of the unfunded tax cuts announced in the “mini” Budget in late September. Yields on gilts with longer maturities have not exceeded last autumn’s levels. The pound gained 0.8 per cent against the dollar, rising to $1.2610.
With borrowing costs rising across the board, many of the UK’s biggest lenders have pulled mortgage deals or raised their interest rates in recent days.
On Monday, Santander temporarily withdrew all of its fixed and tracker mortgages for new borrowers “in light of changing market conditions”, it said.
The prospect of more financial stress to come for households with mortgages heaped pressure on government ministers as the Labour party blamed the government for “economic irresponsibility” and creating mortgage misery.
Responding to a question as part of a discussion on creative industries on Tuesday, Jeremy Hunt, the chancellor, said that he was “really very aware of the pain felt by many families”.
“The biggest single thing that we can do to reduce the pressure on families is to support the Bank of England as they bear down on inflation,” Hunt added.
For financial markets, the strong wage data compounded April’s high 8.7 per cent inflation rate, which suggested UK price growth was returning to normal levels much more slowly than in other countries.
“If there was still any doubt about the direction of monetary policy, these data should solidify another interest rate increase from the Bank of England next week and probably more in the coming months,” said Yael Selfin, chief economist at KPMG.
Markets expect the BoE to increase rates from the current 4.5 per cent to 5.76 per cent by the end of this year, pushing up borrowing costs for the government and mortgage holders.
Megan Greene, who will join the BoE’s Monetary Policy Committee in July, told MPs on Tuesday that she thought high inflation was now driving wages higher. “There are second-round effects that seem to be seeping in,” she told the Treasury committee of the House of Commons.
While she did not indicate how she would vote in her first MPC meeting in August, Greene said the BoE was right to have raised rates in May, something that Silvana Tenreyro, who she is replacing on the committee, voted against.
“I think there is some underlying persistence [to inflation] and so getting from 10 per cent to 5 per cent . . . is probably easier than getting from 5 per cent to 2 per cent,” she added.
Samuel Tombs, chief UK economist at the consultancy Pantheon Macroeconomics, said wage growth had “far too much momentum” for the MPC to stop raising rates.
He noted that although analysts had expected April’s increase in the statutory minimum wage to cause a one-off bump in pay, the data showed wage growth was being driven primarily by higher-paying sectors such as finance and manufacturing and could therefore be expected to continue at a similar pace.
Additional reporting by Daniel Thomas and James Pickford
This article has been amended to correct the peak two-year gilt yield in the wake of the “mini” Budget
Source: Economy - ft.com
