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Markets suggest 85% chance of May rate rise on wage growth boost

by: Paloma Kubiak
  • 17/04/2018
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Markets suggest 85% chance of May rate rise on wage growth boost
Financial markets are pricing in an 85% chance of a Bank of England Base Rate rise next month on the back of the latest official economic data.


The Office for National Statistics (ONS) data showed average weekly earnings increases have turned positive for the first time in more than a year when compared to inflation and UK employment remains at the highest level since comparable records began in the seventies.

Wages in nominal terms (not adjusted for price inflation) increased by 2.8% in the three months to February 2018, both including and excluding bonuses, compared to a year earlier.

But the good news is that average weekly earning for employees in the UK in real terms adjusted for price inflation, increased by 0.2% excluding bonuses, and 0.1% including bonuses.

While this is a small rise, it is the first time since January 2017 that real wage growth has turned positive.


Missing piece of the puzzle

Tom Stevenson, investment director for personal investing at Fidelity International, said: “Wage growth has been the missing piece of the puzzle in Britain’s long, slow recovery from the financial crisis.

“With the final piece now in place the Bank of England now has the catalyst to be able to follow through on its plans to raise interest rates at the next MPC meeting in May and start the move back towards monetary normality.”

As a result, markets are now expecting the Bank of England to respond, with an 85% chance it does so at its next meeting in May.

Ben Brettell, senior economist at Hargreaves Lansdown, added: “But we should remember the Bank faces a delicate balancing act. Inflation seems set to fall back towards target, but a pick-up in wage growth points to an erosion of slack in the labour market.

“This raises the prospect that a wage-price spiral could push inflation back up in future. But household debt levels remain worryingly high, and Brexit-related uncertainty hangs over the economy like the sword of Damocles. Both will sound a note of caution in Threadneedle Street.”


Employment boost

The ONS also revealed the number of people in work increased between December 2017 and February 2018, while the unemployment rate fell.

The employment rate during this three month period was 75.4%, higher than for a year earlier (74.6%) and the highest since comparable records began in 1971.

Its records showed there were 32.26 million people in work, 55,000 more than for September to November 2017, and 427,000 more than for a year earlier.

Unemployment over the three months came in at 4.2%, down on the 4.7% a year earlier, and the lowest figure since 1975.

In total, there were 1.42 million unemployed people, which is 16,000 less than for September to November and 136,000 fewer than recorded last year.

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