UK government borrowing costs have risen above the levels hit during Liz Truss’s disastrous premiership, after stronger than expected jobs and pay figures reinforced expectations that the Bank of England will raise interest rates next week.
Andrew Bailey, the Bank’s governor, said inflation was “taking a lot longer” than hoped to come down, telling the House of Lords economic affairs committee: “As I’m afraid this morning’s numbers illustrated, we’ve got a very tight labour market.
“We still think the rate of inflation is going to come down, but it’s taking a lot longer than we expected.”
After the release of the wage data, two-year gilt yields – the interest rate onUK government borrowing – increased by more than 0.2 percentage points to hit almost 4.9%, surpassing the level reached in the aftermath of Truss’s ill-fated mini budget in September. Yields are also the highest since the 2008 financial crisis, hiking the cost of government borrowing.
It comes after figures from the Office for National Statistics showed growth in average regular pay, excluding bonuses, strengthened to 7.2% in the three months to April – the highest level on record, excluding the Covid pandemic.
Fuelled by bumper pay rises in the City of London for employees in finance and business services, the latest snapshot showed total pay, including bonuses, also increased by 6.5% over the same period.
At those rates, pay growth still lags behind inflation – currently at 8.7% – meaning pay is falling in real terms, putting more pressure on household finances.
Financial markets are betting resilience in the jobs market could stoke persistently high levels of inflation, amid signs of companies continuing to push up wages to meet a severe shortfall in available workers. The Bank is widely expected to increase rates by at least a quarter point from the current level of 4.5% at the next meeting of its monetary policy committee on 22 June.
A further rise in borrowing costs would add to the pressure on households, with figures from the Resolution Foundation showing about 1.6 million mortgage holders will come to the end of cheaper fixed-rate deals end this year, adding about £2,300 to a typical borrower’s annual repayments.
Pat McFadden, the shadow chief secretary to the Treasury, said: “The pressure is greater in the UK than other countries because, in this country, the Conservative government chose the worst possible moment last year to use the country for a giant economic experiment which put booster rockets under mortgage rates.”
Megan Greene, who was appointed in April to join the MPC from next month, told MPs on the Commons Treasury committee on Tuesday that Threadneedle Street might have a tough time to return inflation to its 2% target.
Saying that headline inflation should come down “fairly quickly” this year amid a stabilisation in energy bills, the US economist said there was “some underlying persistence” in inflation. “Getting from 10% to 5% – and this goes for probably every major jurisdiction – is probably easier than getting from 5% to 2%.”
Economists said April’s large increase in wage growth could partly reflect low-pay employers responding to the 9.7% increase in the “national living wage” at the start of the month but said the rise in overall average wages was driven mainly by the momentum in higher-paying sectors.
In a sign of continued strength in the British jobs market, the unemployment rate unexpectedly fell to 3.8% in the three months to April as companies continued to hire new recruits despite growing financial pressure from rising borrowing costs and subdued consumer demand.
Employment rose by 250,000 in the three months to April, lifting the number of people in work overall above pre-pandemic levels for the first time and setting a fresh record high of more than 33 million.
However, long-term sickness among working-age adults outside the jobs market continued to rise, reaching a new record high.
Reflecting heightened economic uncertainty holding back recruitment in some industries, the number of job vacancies fell for the 11th consecutive period, dropping by 79,000 on the quarter to just over than 1m.
Average regular pay growth in the private sector accelerated to 7.6%, the largest growth rate seen outside the pandemic period, when the figures were distorted by furlough wage support and changes in employment. Public sector wage growth was 5.6%, the highest level since 2003.
Jeremy Hunt, the chancellor, said: “The number of people in work has reached a record high, and the IMF and OECD recently credited our major reforms at the budget, which will help even more back into work while growing the economy.
“But 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.”
