Strong UK pay growth boosts chance of Bank of England rate rise

Despite an unexpected surge in joblessness, British salaries climbed faster than predicted last month, which economists believe may push the Bank of England to raise interest rates again next month.

The Office for National Statistics (ONS) said that the jobless rate rose to 3.8%, its highest since the second quarter of 2022, instead of staying at 3.7% as predicted by economists in a Reuters poll.

Annual wage increase for the three months to January was raised up to 5.9% and stayed at that level for the three months to February, above all projections in the Reuters poll, which had predicted a decline to 5.1%. Wage growth excluding bonuses was 6.6%.

After the news, financial markets saw a more than 80% possibility of the Bank of England (BoE) hiking interest rates to 4.5% in May to lower inflation, which was above 10% in February. Sterling surged and government bond yields jumped to a one-month high.

“For those of us expecting the Bank of England to keep interest rates unchanged next month, the latest surprise pick-up in UK wage growth undoubtedly puts a spanner in the works,” ING economist James Smith said.

Average wages in the three months to February were 4.1% lower than a year earlier due to high inflation, one of the worst yearly declines since ONS records began in 2001.

Since late last year, major public sector strike action has resulted from salary discontent. Junior physicians are the latest to strike, demanding a 35% salary increase to make up for a decade of below-inflation pay increases.