Homeowners are advised to anticipate greater mortgage hardship following rapid salary rise.
The yields on gilts, which are used to price mortgages, increased above levels seen in the mini-Budget market upheaval due to a stronger-than-anticipated jump in wage growth.
Outside of the epidemic, UK salaries have increased at their quickest rate on record, supporting predictions that interest rates will need to increase more in order to combat persistent inflation.
According to official data, average regular wages—which exclude bonuses—rose by an unexpectedly high 7.2% during the three months ending in April, up from 6.8% during the same period last year.
Including the skewed epidemic years, the National Living Wage’s 9.7% increase in April helped raise incomes to their highest level since records began in 2001.
Despite the record increase, the Office for National Statistics (ONS) reported that regular wages actually decreased 2.3% when inflation as measured by the Consumer Prices Index (CPI) was taken into account.
The Bank of England has already cautioned that excessive pay growth is one of the factors preventing inflation from easing back at a quicker pace, so experts predicted the statistics would increase the probability of another rate hike next week.
Homeowners will be under more stress as a result of the sharp increase in mortgage rates.
The positive UK jobs report also caused two-year UK Government bond rates, which are used to determine the cost of financial goods like mortgages, to increase above the level observed in the wake of last autumn’s disastrous mini-Budget, peaking at 4.76% at one point.
Since the financial markets now believe interest rates may need to climb from the current 4.5% to 5.5% or possibly higher, causing volatility in the mortgage markets, lenders have already been withdrawing mortgage transactions in droves and raising prices.
According to Samuel Tombs of Pantheon Macroeconomics, “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.”
The Monetary Policy Committee (MPC) should not yet cease raising the Bank Rate, he continued, because wage growth is gaining too much pace.
It is now much more likely that the Bank will need to hike rates next Thursday as well as in August, according to Sandra Horsfield of Investec Economics.
Although there had been 12 consecutive rate increases, she claimed that “it is not clear the medicine administered so far is having enough of an effect” to control inflation.
The ONS numbers also showed resilience in the broader labour market, with Britain’s unemployment rate unexpectedly dropping from 3.9% in the previous three months to 3.8% in the three months to April.
Most economists anticipated a slight increase in the unemployment rate to 4%.
It happened at a period when employment levels broke new records and initially surpassed their pre-pandemic levels.
The ONS reported that the employment rate increased to 76% in the most recent quarter, edging up from 75.9% in the previous three months. At an all-time high of 33.1 million, the number of persons employed increased by 250,000 quarter over quarter as more Britons entered the labour force.
As a result of more recent data, it was estimated that there were 30 million employees in the UK as of May. The ONS also removed the data from last month’s unexpected drop, which now shows an increase of 7,000 in April.
The largest driver of recent employment growth, according to Darren Morgan, director of economic statistics at the ONS, is health and social care, followed by hospitality.
People’s paychecks are still being eaten away by rising prices.
However, there were also some concerning indicators for the labour market. For the 11th consecutive quarter, vacancies decreased, decreasing 79,000 from March to May to 1.05 million. The ONS attributed this to “uncertainty across industries.”
Another indication of the difficulties brought on by rising costs of living is the increase in the number of people who had previously been classified as inactive who now sought employment.
But in the three months leading up to April, the number of persons absent from work owing to long-term illness hit a new record of 2.6 million.
The ONS also reported that strikes caused 257,000 lost days in April, demonstrating how costly widespread industrial action remained.
Chancellor Jeremy Hunt stated: “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.”