Andrew Bailey, governor of the Bank of England, said that inflation is taking “a lot longer” to fall than investors had hoped. Investors were betting on higher interest rates on Tuesday as a result of positive wage data.
After the release of figures that showed the annual wage growth in the private sector climbing to 7.6 percent for the three-month period ending April, the short-term yields on gilts rose higher than the previous highs achieved during the turmoil surrounding Liz Truss’s “mini” Budget from last autumn.
Bailey stated, “I’m afraid that this morning’s figures show us that we have a very tight labor market.” “We think that the rate of inflation will come down but it is taking much longer than expected.”
Lord Nick Macpherson (Treasury permanent secretary from 2005 to 2016) warned Rishi Sunak that a recession could force him to fight an election as prime minister in 2024.
He wrote on Twitter, “It is still possible that the government will get lucky and that the inflation rate may fall faster than expected.” “But I wouldn’t bet on it. It is more likely that Bank of England will increase rates to the point where a recession in 2013 becomes inevitable.
The BoE believes that the wage increase is far higher than the BoE’s target of 2 percent inflation.
The yields of two-year gilt rose by 0.26 percentage points on Tuesday to 4.89 percent, up from their previous peak of 4.64 percent in September after the announcement of unfunded tax reductions in the “mini Budget”. Gilts of longer maturity have not risen above the levels seen last autumn. The dollar rose to $1.2610, a gain of 0.8 percent. In recent days, the UK’s largest lenders have either withdrawn mortgage deals or increased their interest rates due to the rise in borrowing costs.
Santander announced that it temporarily halted all fixed-rate and tracker mortgages available to new borrowers on Monday “in view of the changing market conditions”.
Labour blamed government ministers for creating mortgage misery and “economic irresponsibility”.
Jeremy Hunt, chancellor of the United Kingdom, responded to a question during a Tuesday discussion on the creative industries by saying that he “really was aware of the pain experienced by many families”.
Hunt said that the best thing we can do for families to ease the burden is to support Bank of England in their efforts to combat inflation.
The strong wage data combined with April’s high rate of 8.7 percent inflation meant that the UK was returning to normal prices much slower than other countries.
Yael selfin, KPMG’s chief economist, said that if there were any doubts about the direction of the monetary policy in England, the data would be enough to confirm another rate hike next week, and possibly more in the months ahead.
The markets expect that the BoE will increase its rates to 5,76% by the end this year. This will push up the borrowing costs of the government and mortgage holders.
Megan Greene , who will be joining the BoE Monetary Policy Committee’s Monetary Policy Committee this July, told MPs Tuesday she believes that high inflation is now driving up wages. She told the Treasury Committee of the House of Commons that there were second-round effects.
Greene did not say how she would vote at her first MPC in August. However, she said that the BoE had done the right thing by raising rates in May. Silvana Tenreyro who is replacing Greene on the committee voted against this.
“I believe there is some underlying persistent [inflation] and getting from 10% to 5%. . . It is easier to go from 5 percent to 2 percent,” she said.
Samuel Tombs is the chief UK economist of Pantheon Macroeconomics. He said that wage growth has “far too much momentum”, for the MPC not to raise rates.
He said that while analysts expected the increase in April in the minimum wage to be a one-time bump, the data revealed that wage growth is being driven by high-paying industries such as manufacturing and finance. This means wage growth can continue to grow at the same pace.
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